DERIVATIVE AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Activities

DERIVATIVE AND HEDGING ACTIVITIES

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 interest rates and commodities' prices. We entered into interest rate swaps in 2008. 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. In 2012, the expense recorded to cost of goods sold due to the commodity hedges and the related nickel was immaterial.

As of December 31, 2012 and December 31, 2011, we did not have any commodity hedge contracts outstanding. See also Note 1 - "Summary of Significant Accounting Policies" in these Notes to Consolidated Financial Statements for more information regarding the fair value of derivative instruments and our accounting policy relating to them.