AEGIS Hedging Recommendations - Starting Points for Hedge Discussions

Consumer:

Backwardation in the steel curve allows strikes near current cash prices at reasonable cost. -MRM

Pure Consumer:

In the absence of a liquid options market, add to existing hedges by layering in modest amount of swaps taking advantage of slight backwardation. Dampen impact to profit margins if supply chain issues persist and LME remains elevated. 

Processor: 

Maximize use of pass through pricing in physical contracts. Consider working a sell order in 1Q2022 to protect against possible removal of or significant exemptions to Section 232 tariffs.

Extruder:

Hedge priced purchases and inventory in excess of priced sales to protect against inventory risk, reduced cash flow, and earnings volatility from "metal lag"

Consumer: 

Consider buying inexpensive much out-of-the-money call options to protect against prices at which profit-margin reduction severely threatens cash flow

Producer:

A large "call skew" makes costless collars very attractive, with the added benefit that they preserve upside in a market this has less supply than it needs, especially if weather generates surprise demand. 

Consumer:

Avoid buying call options. They provide the right kind of protection for a consumer who can tolerate some increase in gas prices, but the "extrinsic" value priced in to call premia makes swaps more cost-effective.

Producer:

Floors (puts) as part of a costless collar can now be set where the swaps traded not long ago. 

Consumer: 

Collars may be appropriate for the consumer, too. Some small participation if prices go lower is an appropriate trade-off for some protection at higher prices. Recent collars have been priced neutrally, with little call or put skew. This type of market does not penalize the consumer for using collars. 

Producer:

Despite WTI coming off it's recent peak, we recommend swaps for the balance of the year. Prices are still much improved. Swaps also provide more downside protection as uncertainty remains around reemerging COVID cases, OPEC supply increases, etc.

Producer:

Assuming OPEC’s forecasts are correct, we may be undersupplied heading into late 2022. As a result, we could have upside price risk versus where the forward curve is currently printing at. We recommend option structures to leave yourself with room to participate in potentially higher prices.