Boeing To Hedge Aluminum As Producers Shun Fixed-Price Deals

NEW YORK, Jun 09 -- Boeing Co. (BA) is set to tap the aluminum futures market for the first time to protect itself from swings in the price of the metal, an executive with the aerospace giant's commercial arm told Dow Jones Newswires.

The company plans to introduce a hedging program, which would use the sales of futures contracts to offset physical metal purchases and guard against volatile commodity prices, "probably within the next year," said John Byrne, director of aircraft materials and structures for Boeing's commercial airplanes unit.

The move comes as aluminum producers are pushing for contracts that move in tandem with market prices, rather than fixed-price deals, to supply consumers like Boeing.

Byrne said this has caused the company to turn to the aluminum futures market.

"Nobody will take on a firm, fixed-price contract," Byrne said on the sidelines of an aluminum industry conference here. "It's hard to get suppliers to go more than 18 months out" on such contracts, he said.

It is a drastic switch for Boeing, which used to sign for multi-year, fixed-price contracts. In 1998, Boeing entered an estimated $4.3 billion contract for five aluminum mills to supply its commercial airplanes division for 10 years.

The financial crisis changed all that. Before the crisis, some metal producers who offered fixed-price supply deals could borrow money cheaply and purchase contracts on the futures markets to limit their exposure to swings in commodity prices.

When the credit flow dried up, they wanted to limit the amount of capital tied up by derivatives contracts entered into on behalf of their customers, said Jorge Vazquez, managing director of aluminum with Harbor Commodity Research.

"In the past, vendors took the risk, but now they're trying to pass it to the consumer," Vazquez said.

Charles McLane Jr., chief financial officer of Alcoa Inc. (AA), the largest U.S.-based aluminum producer, told The Wall Street Journal in March that the company's investors demanded it remain exposed to fluctuating aluminum prices on the London Metal Exchange, a main exchange for global metals trading. Benchmark aluminum for delivery in three months settled at $2,660 a metric ton on the LME on Thursday, up about 7% this year.

Boeing's commercial division uses about 150 million pounds of aluminum each year, because it is durable and lighter than competing metals such as steel and copper. Boeing's best-selling commercial aircraft, the 737, requires about 191,000 pounds of heat-treated aluminum plate, Byrne said.

Byrne said Boeing's current suppliers of the metal include Alcoa, Kaiser Aluminum (KALU) and Aleris Corp., which has filed for an initial public offering after emerging from bankruptcy last year.

Byrne wouldn't comment on the type of derivatives contracts the company was planning to enter. Such risk-management instruments in metals markets include futures traded on exchanges, as well as more tailor-made contracts like price swaps.

"We just want stability on our pricing," Byrne said.

Because of the lengthy production process to build aircraft and a backlog of orders, Boeing looks to secure supply of aircraft parts three to five years in advance, and raw materials as far as seven years ahead of an aircraft's final assembly, Byrne said.