What Is Hedging?

Hedging

When it comes to purchasing steel, hedging is a strategy that buyers use to protect themselves against future price fluctuations in the steel market. Steel prices can be highly volatile due to factors like changes in demand, raw material costs, tariffs, or global supply chain disruptions. To manage this risk, companies may lock prices in advance through fixed-price contracts, future contracts, or other financial instruments tied to steel indexes.

For example, a company that knows it will need a large quantity of steel six months from now might enter a contract today to buy at a fixed price. This hedge ensures that even if steel prices rise during the time, the company won't be exposed to higher costs. On the other hand, the company may end up paying more than the market rate, but the tradeoff is price stability and predictability, which is often more critical for budgeting and long-term planning.