Steel is one of the most volatile commodities in the world. Prices shift due to raw material costs, demand cycles, tariffs, currency movements, and freight disruptions. For companies exposed to steel price risk—whether buyers or sellers—derivatives provide a powerful tool to manage uncertainty
What Are Steel Derivatives?
Steel derivatives are financial contracts whose value is linked to the price of steel products. You don’t buy or sell physical steel—instead, you’re speculating on or hedging against price movements
The most common steel derivatives are:
- Futures contracts
- Options contracts
- Swaps
These are typically settled in cash (no physical delivery) and based on benchmark prices, such as those published by indexes like Platts, Argus, Fastmarkets, or LME.
Why Do They Exist?
Steel prices are volatile. A buyer agreeing today to purchase steel for delivery in 3 months could see prices rise dramatically in the meantime. Likewise, a seller committing to future supply might lose margin if market prices drop.
Derivatives allow both sides to lock in a future price, providing financial certainty and risk mitigation.
Key Instruments Explained
Futures
A futures contract is an agreement to buy or sell a fixed quantity of steel at a set price on a future date.
- Standardised
- Traded on exchanges (e.g. LME, CME)
- Most are cash-settled
- Used to hedge or speculate
Example: A buyer purchases 100 MT of HRC futures for December at $700/MT. If prices rise to $760, the buyer receives $60/MT on settlement—offsetting the higher physicalcost.
Options
An option gives you the right—but not the obligation—to buy or sell at a set price before expiry.
- Call option: Right to buy
- Put option: Right to sell
- Premium must be paid up front
Used for flexible hedging strategies, especially when buyers want downside protection without giving up upside potential
Swaps
A swap is a customised contract between two parties to exchange cashflows based on a floating vs. fixed steel price.
- OTC (over the counter), not exchange-traded
- Tailored to contract volumes, dates, and indices
- Common in longer-term supply agreements
Used by traders, service centres, or industrials with predictable volumes.
Which Steel Products Can Be Hedged?
Today, the most liquid steel derivative markets are for:
- Hot Rolled Coil (HRC) – US, EU, and Chinese benchmarks
- Iron Ore – Widely traded on SGX
- Scrap – CFR Turkey and other regional indices
- Coking Coal & Freight – As part of integrated hedging strategies
Derivatives for rebar, wire rod, and CRC exist but are less liquid and more difficult to price.
Who Uses Steel Derivatives?
- Steel buyers (fabricators, OEMs)
- Service centres and stockholders
- Mills and producers
- Commodity traders
- Investment funds and hedge funds
The aim is either to hedge risk or profit from price moves. At M7, we focus on risk reduction, giving clients the confidence to quote, commit, and grow—without being caught off-guard by market shocks
Final Thoughts
Steel derivatives may sound abstract—but they’re quickly becoming a core tool for managing cost certainty. As the global steel market becomes more digital and financialised, the ability to understand and apply basic hedging strategies will separate the reactive from the strategic.
Steel derivatives may sound abstract—but they’re quickly becoming a core tool for managing cost certainty. As the global steel market becomes more digital and financialised, the ability to understand and apply basic hedging strategies will separate the reactive from the strategic.