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CMC’s Business Model Offers A Natural Hedge

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CMC’s business model

We have analyzed the financial performance of Commercial Metals Company (CMC) in previous parts. Now, let’s learn why CMC’s business model offers a natural hedge. A natural hedge is a reduction in risk that arises from an enterprise’s normal business activities.

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Raw materials hedge

We have seen that CMC has metal recycling operations. The company processes and sells both ferrous and nonferrous scrap. Steel scrap also acts as a raw material for CMC’s steel mills.

If scrap prices go up, CMC’s metal recycling operations stand to gain from higher selling prices. However, the profitability of steel mills will go down as a result of higher raw material costs. Similarly, if scrap prices drop, steel mills will benefit from lower raw materials prices, and recycling operations will lose money.

In 1Q15, CMC’s metals recycling operations lost money, but steel mills posted higher profitability. This is because steel scrap prices have fallen over the last few months. The chart above shows this decline.

Hedge against imports

CMC’s steel mills are at the receiving end of steel imports, especially Turkish rebars. However, the company also benefits through imports of steel products in its international trading business. So, CMC is both a victim and a beneficiary of steel imports.

This is not the case for other steelmakers. Nucor (NUE), AK Steel (AKS), and US Steel Corporation (X)—all of which are part of the SPDR S&P Metals & Mining ETF (XME)—don’t have such a hedge against steel imports. All that these companies can do is present their cases to the US Department of Commerce.

Next, let’s see how CMC fares in comparison to its peers in terms of financial performance.

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