SteelHedge is the first decentralized risk management platform for steel and steelmaking raw materials. It helps companies across the value chain ensure budgets, costs and revenues in advance without going through financial intermediation.
The problem is well known to suppliers of steel products and their users in construction, automotive and other industries: the prices of steel and its raw materials fluctuate a lot, turning the supply chain into a roller coaster. Many market participants operate with slim margins and price swings may lead to losses and even bankruptcies. However, most of them stay away from hedging because of limitations of financially intermediated instruments for steel and today’s economy. SteelHedge offers a concrete solution to this problem.
An increasingly volatile market
Steel prices have long been stabilized by annual supply contracts between mining and steelmaking companies. Following China’s spectacular rise in steel production, that annual contracting system collapsed in 2010. Now the Chinese economy accounts for a half of the world’s steel production and demand, and the market has inevitably become dependent on its vitality. In this context, financial speculators started to bet on future prices of steel and iron ore in China and elsewhere. Independent research indicates that such market financialization exacerbates its gyrations.
A vicious circle
For many commodities, market risk has historically been managed through financial derivatives. A derivative contract denotes an exchange based on expectations about future prices of an underlying physical asset. The steel value chain remains sceptical about their usage because of its complexity (two-route, multi-stage manufacturing process coupled with the shifting sands of regional demand, import and export tariffs, iron ore, metallurgical coke, scrap and other raw material prices) and the recent dramatic rise of speculation in commodity derivatives. By linking physical and financial markets, they create a major conflict of interest: market volatility feeds speculative trading but is detrimental to the real economy. Stringent financial regulations hamper demand for traditional hedging from SMEs and the companies inexperienced in financial derivatives. Combined, these factors perpetuate a vicious cycle in which low demand reduces the liquidity of a derivative market and low liquidity reduces the demand for risk management solutions.
Beyond financial derivatives
SteelHedge deals with these problems at the roots, streamlining risk management while keeping it safe. The suppliers and users are put in direct contact to negotiate and conclude innovative paper contracts grounded in physical markets, and reputable financial institutions are engaged to secure the ensuing settlements. Very flexible, these bilateral contracts can be concluded electronically in a digital B2B marketplace that is disconnected from financial markets and not accessible to speculators. The ecosystem is designed to exclude disagreements about price formation, protect the steel market from financialization and reduce the volatility of steel prices. Thanks to a recently obtained authorization, real-economy companies across the supply chain may trade in a deregulated professional hedging market without financial intermediation.
Simplicity and efficiency
SteelHedge, founded by steel and information technology professionals, aims to facilitate metals risk management and make the entire supply chain more efficient. To this end, it is very simple: the Swiss company promises that anyone can understand hedging and start using the system in one hour. Key industry stakeholders have already approved the concept and the platform will be launched in the next months.
