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Aug 13, 2023

Flack to acquire steel, aluminium OEMs to drive US hedging adoption

FGM’s acquisition of metal roofing and wall systems manufacturer Fabral on February 27 is part of this strategy, and the Scottsdale, Arizona-based service center has set up a third pillar in its

FGM’s acquisition of metal roofing and wall systems manufacturer Fabral on February 27 is part of this strategy, and the Scottsdale, Arizona-based service center has set up a third pillar in its business for this purpose, Flack told Fastmarkets on Friday March 3.

“There are several reasons we bought Fabral,” Flack said. “The acquisition brings us closer to the end user of the painted steel products we distribute at FGM, and we found the Fabral business an excellent candidate for our risk management models which use exchange traded derivatives.”

FGM which offers fixed prices to its customers primarily via steel, scrap and aluminium futures - is comprised of three segments: its distribution business, the Flack Metal Bank and Flack Manufacturing Investments (FMI), under which the Fabral acquisition was completed, Flack told Fastmarkets.

“Previously we thought that the Metal Bank suite of financial products would be enough to change the industry,” Flack said. “However, ingrained buying behaviors have made too many OEMs unable to adopt risk management strategies. Along the way we realized that it is the combination of solid financial products along with investing in OEMs that will prod the industry to broadly adopt hedging.”

FMI will “focus on making both control and non-control investments into steel and aluminum OEMs and there will hopefully be more deals this year,” Flack said, adding that an investment in a second steel-focused OEM may close as quickly as the end of March.

“We are price makers in all the markets we operate in, not price takers,” Flack said. “We price all our markets on a forward curve.”

FGM traded just above 1 million short tons of HRC futures on the Chicago Mercantile Exchange (CME) in 2022, Flack said, the number growing from 500,000 short tons in 2020 and 750,000 short tons in 2021.

“The CME traded about 5.2 million short tons of HRC futures in 2022, in a market sized at 75-80 million tons of sheet products,” Flack noted.

Flack expects FGM to trade about 1.4 million short tons of steel futures in 2023, but this pace of uptake in hedging steel futures is not enough, he said.

“We have the most volatile steel market in the world - hedging is the only antidote to managing price cycles,” Flack told Fastmarkets.

CME busheling futures are settled against Fastmarkets’ steel scrap No1 busheling, index, delivered Midwest mill, which was calculated at $475.25 per ton on February 10, up by 5.83% from $449.06 per ton on January 10.

Flack’s comments come while US hot-rolled coil prices continue a historic climb, with Nucor Steel notifying customers on March 3 that it was increasing its HRC base price to $1,150 per short ton ($57.50 per hundredweight), marking the eighth round of flat steel base price increases by major mills since November 28, 2022.

Nucor’s price hike surpassed Cleveland-Cliff’s announcement of a $100 per ton increase for HRC, which raised base prices to $55 per cwt on February 27.

Fastmarkets’ daily steel hot-rolled coil index, fob mill US Midwest was calculated at $50.19 per cwt ($1,003.80 per short ton) on Friday, up by 2.85% from $48.80 per cwt one week earlier, and up by 55.50% from $32.28 per cwt on November 28, 2022.

The flurry of prices increases have bewildered US buyers, with some sources saying that mills have the upper hand due to market power and strong order books stretching into April and May, while others doubting that demand is strong enough to justify the rapid pace of hikes.

“If you do not hedge you are uninsured against price volatility; if you are not hedging you are gambling,” Flack said, adding that steel buyers “are not incentivized by their organizations to quantify asymmetric downside risks.”

FGM launched Flack Metal Bank (FMB) in 2021 to allow buyers of flat-rolled metal products to take advantage of pricing on the forward curve regardless of whether they secure physical inventory from FGM or maintain existing supply relationships.

“Two years ago we had zero customers from among our competitors, and now we have about a dozen service center customers engaged with FMB,” Flack said.

“Steel mills do not want to deal with financial aspect of futures, and banks do not want to deal with the physical aspect - Metal Bank does both,” Flack said.

FGM’s first physical service center FGM Houston, on the campus of North Shore Steel, slit its first coil on Thursday March 2, Flack said.

FGM Houston - slated to encompass 60,000 square feet — was initially expected to open in the fourth quarter of 2022.

FGM Houston is in a startup mode, Flack said, with the production in March expected to be 2,000-3,000 short tons, Flack said. “FGM Houston will support our existing physical distribution business.”

The services offered at FGM Houston will include “a wide array of metals products including painted hot-rolled, cold-rolled, galvanized, galvalume, and aluminium, as well as bare and acrylic-coated galvanized and galvalume, bare aluminium, and stainless steel products,” according to a company statement in June 2022.