How Does the Construction Industry Benefit from Financial Hedging?

How Does the Construction Industry Benefit from Financial Hedging?

How Does the Construction Industry Benefit from Financial Hedging?

Like any other industry, the construction sector is highly susceptible to the volatility of the stock market. Price movements that impact the production costs of materials can have a butterfly effect on wider development projects and building contracts. The movement of oil prices and energy cost all impact the manufacturing output of many common building materials such as steel, cement, bitumen and glass.

Now that we have a clearer picture of the pandemics overall impact it is easy to identify where some of the financial burdens originate. Supply chains are now under great pressure to deliver materials across the globe, and with shortages in key elements such as timber, prices are inflating.

In this post we will identify how businesses reduce the risk of financial loss in the face of changing market conditions.

What is Financial Hedging?

In simple terms, financial hedging is an investment practice that can offer protection on riskier trades and situations. For example, a company may be in the market to acquire a certain amount of steel. This company can create a hedge contract that stipulates the price of steel for a set amount of time. If the market value of steel changes, the company will still pay the contractual price for the same material.

Businesses and investors who trade futures in UK markets often rely on hedge bets to ensure they have a clear and transparent financial investment, regardless of market conditions.

Hedging can be categorised into long and short contracts. Longer contracts protect against volatile price changes for an investor during the term of their contract. However, there is greater risk in long hedges that could see the market price of a material drop considerably. In this scenario, the business would still have to pay the contract amount, causing a financial loss.

Short hedges are simply a shorter contract and offer much more flexibility and the potential to reduce losses.

Risk Management in Construction Finance

Financial loss is a huge consideration when running a time sensitive project and so understanding marketing conditions can be a crucial step. Ensuring a project has a dedicated construction finance manger can help mitigate the risks in construction.

Not only this, a CFM should make proper use of an operational budget, predict profitability, employ and maintain compliance, and anticipate any future financial needs.

Having the foresight to plan out and predict future financial commitments will enable a construction project to run smoothly over the projected timeframe. Relating this back to financial hedging, having a dedicated CFM could provide an opportunity to plan out any financial losses caused by stock market movements, socioeconomic events and impacts to material prices.

Determining costs early on within a project will enable a more balanced approach to the overall financial targets and will stabilize the risk factor.

Due to so many uncertainties brought on by the pandemic, hedging can be a reliable way for managing costs for the construction industry.

How Does the Construction Industry Benefit from Financial Hedging?
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How Does the Construction Industry Benefit from Financial Hedging?

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How Does the Construction Industry Benefit from Financial Hedging?
BDC 282. July 2021

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How Does the Construction Industry Benefit from Financial Hedging?