DERIVATIVE AND HEDGING ACTIVITES

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Activities

DERIVATIVE AND HEDGING ACTIVITES

From time to time we enter into derivative transactions to hedge our exposures to interest rate and commodity price fluctuations, the effect of which is to achieve more predictable cash flows and to reduce our exposure to fluctuations in commodities prices.

We entered into interest rate swaps in 2009. We entered into commodity hedges beginning in July 2012. We are authorized by the Board of Directors to hedge up to 50% of our nickel inventory. We do not enter into derivative transactions for trading purposes. Our principal use of derivative financial instruments is to manage commodity price risk.  We maintain a commodity-price risk management strategy that uses derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity-price volatility.  For example, the blending of our metal products, specifically stainless steel, requires a significant volume of nickel.  Price fluctuations in nickel cause the actual purchase price of nickel to differ from anticipated prices.

To manage price risk related to nickel purchases and nickel inventory on-hand, we use nickel futures and options contracts that trade on regulated commodity exchanges to lock in our nickel costs. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on nickel purchases and have been designated as fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged items (that is, nickel or other specific metals) in the same line item -cost of goods sold - as well as the offsetting loss or gain on the related commodity hedge. As of September 30, 2012, we did not record any gain or loss to cost of goods sold due to the commodity hedges or the related nickel due to immateriality, thus, there was no income statement impact. As of September 30, 2012, the total pounds of our commodity hedge contracts were 26.5 thousand, or 2.4% of our nickel inventory, valued at $221.1 thousand. We did not have any commodity hedge contracts as of September 30, 2011.

The Company assesses the effectiveness of a commodity hedge contract based on changes in the contract's fair value.  The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items.  The amounts representing the ineffectiveness of these hedges are not expected to be significant. See also Note 1 - "Summary of Significant Accounting Policies" in these Notes to Consolidated Financial Statements for more information regarding the fair value of these derivative instruments and our accounting policy relating to them.