Steelmakers should use derivatives, says Renault-Nissan executive

Renault-Nissan deputy general manager, Nicolas Fourrier, of supplier account office, told Reuters that steelmakers should utilize derivatives to manage their input costs in order to give their customers, like the automakers, the long-term price stability they need. He added that those steel suppliers that successfully use hedging instruments and offer long-term price contracts are more likely to obtain customers. He also stated that the development of liquidity in the iron ore derivatives market could give opportunities to steel mills to give longer term prices to the customers.

BHP Billiton, Vale and Rio Tinto, which are the three iron ore producers, rejected a decades-old annual pricing scheme in favor of quarterly pricing last year, says Autonews. While pricing for iron ore, which is a core ingredient in steelmaking, becomes more flexible, steelmakers are pushing for shorter-term steel pricing mechanisms to transfer price volatility to customers. However, the customers are resisting frequent price reviews because higher volatility would make it more difficult for them to manage costs.

This year, Renault-Nissan agreed with steelmakers to review steel prices twice a year but states that more frequent price reviews would be unacceptable. Fourrier disclosed that any shorter period will cause accounting problems, and going more than six months is not possible. He added that Renault-Nissan is not going to hedge coking coal or iron ore because it is not directly involved in these markets. On the other hand, Volkswagen AG is studying the use of steel derivatives to lock in materials costs and protect margins, Michael Wagner, who is the company's head of treasury commodities trading, told Reuters in an interview last Tuesday. [via - 4wheelsnews]