According to Investopedia, in 2021, the demand for steel increased by 2.7%.

While factors like Russia’s invasion of Ukraine have seen the steel industry become disrupted, as both countries have traditionally been two of the world’s biggest steel exporters, and demand has dropped a little as a result, steel stocks are still performing very well.

In fact, the steel stocks represented by the VanEck Vectors Steel ETF, for example, have actually been outperforming the wider market.

However, steel prices are rising.

To be fair, steel prices have always fluctuated a lot. Therefore, it can be challenging to forecast how steel stocks will perform in comparison to some other stocks.

The good news is it is possible to offset the risk of adverse price fluctuations in steel via hedging.

How does hedging work?

If you are not aware, hedging is basically protection against negative events that affect prices.

Hedging against rising steel prices, if done in the right way, can lead to the changes in steel prices being mostly offset by the hedge. In turn, investors can protect their profit margins and asset values.

Because steel trading has been based on fixed spot prices traditionally, with no long-term contracts between purchasers and sellers, which helps to ensure a stable supply, many traders bet on price increases or drops and enter into either short or long positions or perform back-to-back cargoes.

The trouble with those kinds of trading methods is they do not protect against volatile prices. Therefore, investors are highly exposed to price swings while steel prices fluctuate.

But by using hedging tools that are already commonly used in other commodity markets, like the natural gas, petrochemical, and oil industries, you can ensure you perfectly hedge against rising steel prices.

The Best Steel Stocks to Invest in

In addition to using the right hedging tools, when trading stocks online, it is important that you use the best online stock trading platform and invest in the right steel stocks.

Investopedia lists the current best-value steel stocks, which are the ones with the lowest twelve-month trailing price-to-earnings ratio, as United States Steel Corp., ArcelorMittal SA, and Algoma Steel Group Inc.

You may prefer to invest in the fastest-growing steel stocks, which are those that are ranked by a growth model that scores companies on a 50/50 weighting basis for the companies’ most recent quarterly year-on-year percentage of revenue growth and earnings-per-share growth.

At present, some of the fastest-growing steel stocks are Commercial Metals Co., Steel Dynamics Inc., and Nucor Corp.

Hedging Against Fixed-price Volatility

In order to perfectly hedge against rising steel prices, consider hedging against fixed-price vitality.

It is possible for a monthly forward offtake price to be fixed, based on the daily average of a certain stock’s price indices, in order to hedge against the fluctuating prices of steel in a specific region.

When you go down this route, you will attain a floating discount or premium that is applied to the average price determined by the market situation on a monthly basis.

Hedging for Half-months

Another option for reducing price risk is to hedge for half-months.

For example, if a buyer expects prices to climb in the second half of a loading month and is bearish for the first half, the buyer can secure a discount on the spot cargo after negotiation.

Using Both Fixed Spot Prices and Daily Average Indices

A combination of both daily average indices and fixed spot prices can be used in off-take contracts.

That can be a good option if you have a fixed price in mind.