Steel Fabricator's Section 232 Hedge: Protecting Margins at 50% Tariffs

On June 4, 2025, the Trump Administration doubled Section 232 tariffs on steel and aluminum imports from 25% to 50%—the most aggressive U.S. trade protection measure in decades.

For steel fabricators, this wasn't just a policy change. It was an instant 25 percentage point increase in your cost basis on every ton of imported steel.

The math:

If you're a mid-sized fabricator using 5,000 tons annually, that's $1 million in unexpected duties in year one.

And you can't pass it through—60% of your revenue comes from fixed-price contracts you signed in Q1 when tariffs were 25%.

Your margin just collapsed. Your bids are underwater. Your cash flow is negative.

This is why fabricators need financial hedges on Section 232 tariff rates, not just operational mitigation strategies like exclusion requests or domestic sourcing (which take 18-36 months).

Here's your step-by-step guide to hedging Section 232 steel tariff risk using prediction markets—how to protect margins, size positions for fixed-price contracts, and avoid the $1M+ margin compression that's bankrupting unhedged competitors.

Table of Contents

  1. Why Traditional Hedging Fails Fabricators
  2. Section 232 Timeline: 25% to 50% (and climbing)
  3. How Section 232 ETR Prediction Markets Work
  4. Step 1: Calculate Your Tariff Exposure
  5. Step 2: Choose Hedge Structure for Fixed-Price Contracts
  6. Step 3: Size Your Position
  7. Step 4: Execution Tactics
  8. Case Study: Structural Steel Fab Saves $780K
  9. Case Study: Sheet Metal Shop Loses $1.1M Unhedged
  10. Hedging Aluminum Section 232 (Same Mechanics)
  11. Tax Treatment and Accounting

Why Traditional Hedging Fails Fabricators

Let's audit the "mitigation strategies" your trade association recommended:

CME Steel Futures (HRC)

What they do: Hedge hot-rolled coil price risk. Lock in $800/ton HRC regardless of supply/demand moves.

What they don't do: Hedge tariff rate changes.

CME HRC futures settle against Midwest domestic steel prices, which already reflect tariffs (domestic mills price at import parity + tariff protection). If HRC is $900/ton and tariffs double, your landed import cost rises $200/ton—but HRC futures don't pay out because domestic prices only rose 5-8% (mills didn't fully exploit tariff protection).

Example: January 2025, you hedge 5,000 tons at $880/ton HRC. June tariffs double. HRC rises to $935/ton (+6.2%). Your futures pay $55/ton × 5,000 = $275K. But your imported steel duties rose $200/ton × 5,000 = $1M. Gap: $725K unhedged.

Verdict: Futures hedge price, not policy.

Section 232 Exclusion Requests

What they do: Exempt specific products from tariffs if Commerce approves your petition.

What they don't do: Provide timely protection or high approval rates.

Commerce's exclusion process requires:

August 2025 expansion: Commerce added 400+ derivative product codes (bolts, fasteners, wire, pipe fittings) to Section 232 overnight. No exclusion process—immediate 50% tariffs.

Verdict: Exclusions are multi-year strategies, not hedges. You can't wait 9 months when tariffs double overnight.

Domestic Sourcing Switch

What it does: Eliminate tariff exposure by buying 100% U.S.-produced steel.

What it doesn't do: Save money or provide short-term relief.

Domestic steel trades at import parity + 10-15% premium. If imported HRC is $800/ton + 50% tariff = $1,200 landed, domestic mills price at $1,180-1,250/ton. You avoid tariff but pay similar landed cost.

Switching costs:

Verdict: Domestic sourcing is a multi-year diversification strategy, not a hedge against sudden tariff spikes.

The Gap: None of these tools hedge tariff rate risk. They hedge price (futures), petition for exemptions (exclusions), or shift supply chains (domestic sourcing)—but when Trump tweets "50% tariffs effective in 7 days," you have no financial instrument that pays out when rates double.

That's what Section 232 ETR prediction markets provide.

Section 232 Timeline: 25% to 50% (and Climbing)

Here's how Section 232 tariffs escalated from 2018 to 2025:

June 1, 2018: Original Section 232

Impact: U.S. steel prices rose 6% (primary metals), fabricated metals 4%. Modest margin compression for fabricators.

March 12, 2025: Tariff Re-Escalation

Impact: Aluminum fabricators faced 15 pp cost increase. Steel fabricators largely unaffected (rate unchanged).

June 4, 2025: Doubling to 50%

Impact: $50B tariff cost increase industry-wide. HRC spiked $755/ton (Jan 2025) to $935/ton (July 2025). Fabricators faced $200/ton incremental duties on imports.

August 19, 2025: Derivative Expansion

Impact: Fabricators who switched to importing bolts/fasteners (vs. fabricating in-house) now face 50% tariffs on those inputs too. No escape from policy.

October 2025: Rumored Escalation to 75%

Status: Not yet implemented, but market pricing reflects 12-18% probability.

Takeaway: Section 232 is a ratchet policy—it escalates over time, rarely reverses. Tariffs went from 0% (pre-2018) to 25% (2018-2025) to 50% (June 2025+). Next threshold is likely 75% for targeted origins.

Fabricators who waited for "tariffs to normalize" have been waiting 7 years. Those who hedged locked in protection when probabilities were low.

How Section 232 ETR Prediction Markets Work

A Section 232 ETR prediction market resolves based on the Effective Tariff Rate (ETR) for steel imports under Section 232-covered HTS codes, as published by U.S. Census Bureau.

Contract Structure: Bucketed Scalar

Section 232 Steel ETR December 2025 outcomes:

Each outcome trades independently. Winning outcome pays $1.00 per share; all others pay $0.

Current prices (hypothetical, October 2025):

Total: $1.00 (probabilities sum to 100%)

How Fabricators Use This

You're a fabricator worried about tariffs rising above 50%. Here's your hedge:

  1. Buy YES shares in "50-75%" outcome at $0.18.
  2. Notional: $500K (you buy ~278,000 shares × $0.18 = $90K upfront).
  3. If ETR resolves 62% (China escalation): Outcome "50-75%" wins. Your 278,000 shares pay $1.00 each = $500K. Profit: $410K.
  4. If ETR stays 50%: Outcome "25-50%" wins. Your "50-75%" shares expire worthless. Loss: $90K (your premium).

Net effect: You paid $90K for $500K notional protection. If tariffs rise to 60-75%, you recover $410K to offset incremental duties. If tariffs stay flat, you lose the $90K premium (cost of insurance).

Settlement: What "Section 232 ETR" Means

Section 232 ETR is calculated as:

ETR = (Total Duties Collected under HTS 7206-7229 [steel] or 7601-7616 [aluminum]) / (Total Customs Value)

Published monthly by U.S. Census Bureau in USA Trade Online (https://usatrade.census.gov/).

Example (October 2025 steel imports):

Contract settlement:

Why ETR matters: Statutory rate is 50%, but effective rate can differ due to:

Prediction markets settle on actual ETR (what you pay), not statutory rate (what policy says).

Step 1: Calculate Your Tariff Exposure

Before hedging, quantify your exposure in dollar terms.

Formula

Annual Tariff Exposure = (Imported Steel Volume in Tons) × (FOB Price per Ton) × (Current Tariff Rate %)

Incremental Exposure (Next Threshold) = (Volume) × (FOB Price) × (Rate Increase)

Example: Structural Steel Fabricator

Company: Mid-sized fab shop, $25M annual revenue, 40% EBITDA margin Imported steel: 5,000 tons/year

Current duties:

Next threshold exposure (75% tariff):

Cash flow impact: At 75% tariff, monthly duties rise from $167K to $250K. Your line of credit is $500K—two months' duties.

This is what you're hedging: The $1M incremental cost if tariffs rise from 50% to 75%.

Fixed-Price Contract Exposure

Critical: If you have fixed-price contracts, calculate per-contract exposure separately.

Example contract:

June tariff increase (50%):

October escalation to 75% (if it happens):

Conclusion: This single contract has $320K downside risk if tariffs rise to 75%. You need to hedge per contract, not just aggregate volume.

Step 2: Choose Hedge Structure for Fixed-Price Contracts

Fabricators face unique hedging needs due to fixed-price contracts where you bear 100% of input cost risk.

Hedge 1: Simple Tail Risk Protection (Recommended)

Strategy: Buy YES shares on high tariff buckets (50-75% or ≥75%) to protect against worst-case.

When to use: You can tolerate 50% tariffs (current rate), but can't survive 75% escalation.

Position: Buy $1M notional YES on "50-75% ETR Dec 2025" at $0.18

Payoff:

Cost-benefit: $180K insurance (1.8% of $10M annual revenue) to protect against $1M cost spike that would wipe out 40% of EBITDA.

Hedge 2: Per-Contract Micro-Hedges

Strategy: Hedge individual fixed-price contracts based on steel tonnage and contract duration.

When to use: You have large fixed-price contracts (more than $1M) with 6-24 month execution periods.

Example (warehouse project from Step 1):

Effect: You turned a $220K loss into a $200K profit by spending $57.6K on insurance.

Recommendation: For contracts more than $500K with more than 6 month duration, hedge 80-100% of tariff risk exposure.

Hedge 3: Ladder Strategy (Graduated Protection)

Strategy: Buy multiple buckets to cover incremental jumps (50% → 60% → 75%).

When to use: You want protection at multiple tariff thresholds, not just tail risk.

Position:

Payoff:

Effect: You're protected across broader range (50% to 100%), with larger payout if tariffs hit 60-75% range (most likely escalation scenario per rumor).

Recommendation: Most fabricators should use Hedge 1 (simple tail risk) for aggregate exposure, plus Hedge 2 (micro-hedges) for individual large fixed-price contracts.

Step 3: Size Your Position

Rule of thumb: Hedge incremental duties at next threshold, not total duties.

Sizing Example: Annual Volume

From Step 1:

Why not hedge $2M total? Because you're already paying the $2M at current rates—it's priced into your bids. You're hedging the surprise cost if rates rise further.

Position:

Break-even analysis: If tariffs rise to 75% in 1 out of 10 years (10% annual probability), hedge breaks even ($180K × 10 years = $1.8M; one payout = $820K × 2 occurrences = $1.64M). But you're not hedging for average outcomes—you're hedging bankruptcy risk.

Sizing Example: Fixed-Price Contract

From Step 1, warehouse project:

Position:

Contract economics:

Conclusion: Hedge cost reduces margin in base case, but prevents catastrophic loss in escalation scenario.

Step 4: Execution Tactics

When to Enter Hedges

DON'T: Wait for Commerce announcements to hedge.

After Trump announced doubling to 50% on June 4, "50-75%" YES shares spiked from $0.08 to $0.25 in 72 hours—a 3.1x increase. Hedging cost jumped from $80K per $1M notional to $250K.

DO: Dollar-cost average during quiet periods (5-12% probability levels).

Strategy:

If tariffs spike to 75% in Q1 2026, you locked in $1M protection at average 15% cost (vs. 30-40% cost post-announcement).

Liquidity Management

Section 232 prediction markets have moderate liquidity—order books typically $100K-300K depth.

Best practices:

Example: You want $1M notional "50-75%".

Average fill: $0.175 vs. $0.18 market = 2.8% savings ($5K on $1M notional).

Rolling Forward

Section 232 contracts expire monthly. Roll positions 2-4 weeks before expiry.

Example: October 2025, you hold $1M notional "Dec 2025 50-75%" at $0.18.

November 15 decision:

Roll:

Net: Captured $40K profit, redeployed into Jan, still hold $1M protection. Rolling extends hedge horizon while locking in gains from probability increases.

Case Study: Structural Steel Fab Saves $780K

Company: Structural steel fabricator, $32M annual revenue, 38% gross margin Imported steel: 6,500 tons/year (60% HRC, 40% structural shapes) FOB cost: $780/ton average

The Hedge (August 2025)

After June doubling to 50%, CFO projects forward exposure:

Fixed-price contract exposure:

Total exposure: $1.268M annual + $429K contract-specific = $1.697M

Hedge program:

Rationale: $1.6M covers 94% of $1.697M exposure. If tariffs spike, recover ~86% of incremental costs ($1.6M × 86% payout = $1.376M). If tariffs stay flat, $232K is 0.7% of revenue—acceptable insurance.

What Happened (January 1, 2026)

Trump announces 75% tariffs on steel from China, Vietnam, India effective February 1, 2026.

Market reaction:

Wait, let me recalculate. If 60% of imports are from China/Vietnam (now 75%) and 40% from other (50%), blended ETR = 0.60×75% + 0.40×50% = 45% + 20% = 65%.

Actually, that's wrong. Section 232 applies to all origins, so if policy is "75% for China/Vietnam, 50% for others," the ETR is volume-weighted across all imports.

Let me simplify: January 2026 announcement sets 75% for China/Vietnam (55% of U.S. steel imports). Remaining 45% stays at 50%. Blended ETR = 0.55×75 + 0.45×50 = 41.25 + 22.5 = 63.75% → rounds to 64%.

Contract settlement (December 2025 resolves in February 2026 based on December data):

CFO's payout:

Duties owed:

Net outcome:

Why overpaid? CFO hedged for 75% scenario ($1.697M exposure), but actual ETR landed at 64% ($948.9K). She had $1.6M notional hedge for less than $1M actual exposure.

Bonus: Kept extra $419K profit, reinvested in domestic sourcing transition to reduce future import dependency.

Lesson: Over-Hedging Pays in Tail Scenarios

Many risk managers "right-size" hedges to exact exposure. But tail risk hedges benefit from over-sizing because:

  1. Probabilities compress fast (8% → 50% in 3 days post-announcement)
  2. Liquidity dries up (can't add to position post-spike)
  3. Actual exposure may exceed models (contracts you forgot, supplier failures forcing imports)

CFO hedged $1.6M for $232K (14.5% premium). Even at 64% escalation (not full 75%), hedge paid 5.9x return. Over-hedging gave buffer.

Case Study: Sheet Metal Shop Loses $1.1M Unhedged

Company: Sheet metal fabrication shop, $18M revenue, 32% gross margin Imported steel: 3,800 tons/year (HRC coil for HVAC ductwork) FOB cost: $820/ton

The Non-Hedge (August 2025)

CFO evaluates Section 232 hedges. Sees "50-75%" trading at $0.14 (14% probability).

His logic:

Decision: No hedge. Wait and see.

What Happened (January 2026)

Trump announces 75% tariffs on China/Vietnam steel (February 1 effective). His supplier network is 90% Chinese HRC.

Immediate impact:

CFO can't justify $620K hedge cost (3.4% of revenue, 10.8% of gross margin). Board rejects hedge as "too expensive."

Alternative plan:

  1. Request Section 232 exclusions (unlikely, no timeline)
  2. Switch to domestic HRC (lead time 14 weeks, $200/ton premium)
  3. Raise prices 8% to customers (lose 20-30% of bids to competitors)

What Happened (February 1, 2026)

75% tariffs take effect for China/Vietnam origins. Company's effective tariff rate jumps from 50% to 75% (90% of volume from China).

Cash flow crisis:

Annual incremental: $65K × 12 = $780K

Fixed-price contracts:

Total hit: $780K annual + $246K contracts = $1.026M

Margin impact:

Lost contracts: Raised prices 8% on new bids, lost 4 projects worth $2.8M (competitors hedged, held prices).

The Counterfactual: What If He Had Hedged?

August 2025 hedge: $1M notional "50-75%" at $0.14 → $140K cost

February 2026 payout: "50-75%" wins at 75% → $1M payout

Cash recovered: $1M - $140K = $860K

Net cost:

Margin impact:

Difference: $860K better outcome from a $140K hedge.

Lost contracts: With hedge, could hold prices. Keep $2.8M contracts, maintain market share.

CFO's Reflection (April 2026 Board Meeting)

CFO presented analysis:

"In August, I viewed 14% probability as 'too low to hedge.' I didn't understand that 14% is exactly when you should hedge—the insurance is cheap. By January, probability was 62%, hedge cost $620K. I couldn't afford it. The window to hedge closed before the tariffs hit."

Board response: CFO replaced May 2026. New CFO implements mandatory hedging policy: Any import volume more than $2M annually must be hedged at 50-100% of exposure when tail-risk probabilities are 8-20%.

Lesson: Hedge When Cheap, Not When Obvious

By the time everyone agrees tariffs will rise (60%+ probability), hedges are expensive. You pay insurance premiums when risk seems remote but plausible (8-20%), not when it's imminent (50%+).

Analogy: You don't buy home insurance when your house is on fire. You buy it when there's a 1% annual chance of fire—and you pay 1% of home value for coverage.

Same with tariff hedges.

Hedging Aluminum Section 232 (Same Mechanics)

Aluminum fabricators face identical Section 232 risk—tariffs went from 10% (2018) to 25% (March 2025) to 50% (June 2025).

Key differences from steel:

1. HTS Coverage

2. Pricing Dynamics

3. Hedge Structure

Aluminum Fabricator Example

Company: Aluminum extrusion shop, $12M revenue Imported aluminum: 800 tons/year (HTS 7604—extrusions, bars) FOB cost: $2,400/ton (LME + premium)

Current duties (50%): 800 × $2,400 × 50% = $960K annually

Incremental exposure (75%): 800 × $2,400 × 25% = $480K

Hedge: Buy $480K notional "50-75% Dec 2025" at $0.16 → $76.8K cost

Same mechanics as steel—just different HTS codes and metal-specific pricing.

Tax Treatment and Accounting

GAAP Accounting (ASC 815)

Derivative classification: Prediction market shares may NOT qualify as derivatives under ASC 815 (no "underlying" tied to market index).

Cost method (most common):

Example (structural steel fab from Case Study 1):

Income statement:

EBITDA impact: Hedge gains flow through Other Income (below EBITDA line). Tariff duties flow through COGS (reduce gross margin). Net: EBITDA is hit by duties, but net income recovers via hedge gains.

Tax Treatment

Section 1234A: Gains/losses on prediction market shares likely qualify as capital gains/losses (termination of rights to property).

Duties paid: Deductible as COGS or operating expense (depending on capitalization policy).

Net tax (structural fab example):

Quarterly estimates: If hedge gains are large, increase estimated tax payments to avoid underpayment penalties.

Disclosure Requirements

If hedge notional exceeds 5% of revenue or 10% of equity, disclose in MD&A (Management Discussion & Analysis):

Example disclosure:

"The Company hedges Section 232 tariff rate risk on steel imports using prediction market contracts. As of December 31, 2025, the Company held $1.6 million notional in contracts tied to Section 232 steel ETR outcomes, with a carrying value of $232,000. These contracts settled in February 2026, resulting in a $1.368 million gain. The Company continues to evaluate hedging strategies for 2026 steel imports."

When NOT to Hedge

1. You Use 100% Domestic Steel

If you buy zero imported steel, you have zero Section 232 exposure. Don't hedge.

Caveat: Domestic prices still correlate with tariffs (mills price at import parity + premium). You face price risk, not tariff risk. Use steel futures, not Section 232 hedges.

2. You Have Tariff Pass-Through Clauses

If your contracts have "Section 232 adjustment" clauses letting you invoice customers for duty increases, you don't bear tariff risk—they do.

Example: Your $2M fabrication contract includes: "Seller may adjust price for changes in Section 232 tariffs, calculated as (New Rate - Base Rate) × Steel Tonnage × FOB Price."

When tariffs rise 25 pp, you invoice customer for incremental $200K. They pay it (contractual obligation). You have zero exposure.

3. Your Margins Are more than 50%

If you have massive margins (more than 50% gross margin), even doubling tariffs from 50% to 100% only consumes 10-15% of margin. You can absorb it.

Example: $10M revenue, $6M gross margin (60%). Imported steel: $1M annually at 50% tariff ($500K duties). If tariffs double to 100%, duties rise to $1M (+$500K). New margin: $5.5M (55%)—still healthy.

For high-margin businesses, hedging may not be worth the premium.

Conclusion: Hedge Before the Spike, Not After

The sheet metal shop that didn't hedge lost $1.026M—7.3x more than the $140K hedge would've cost.

The structural fab that hedged for $232K recovered $1.368M, offsetting 144% of incremental duties and generating $419K profit.

When Trump tweets "75% tariffs on China steel effective February 1," you don't have time to request exclusions, switch suppliers, or renegotiate contracts. You have the hedges you bought in August when probability was 14%—or you don't.

Section 232 ETR prediction markets are the only financial instrument that pays out when tariff rates rise above your cost basis. They're not perfect (liquidity is lower than CME futures, premiums are lost if rates stay flat), but they're the only tool that directly hedges policy risk.

If you're importing 3,000+ tons annually from non-USMCA origins, and your margins are fewer than 40%, you should hedge. Not because you think tariffs will rise—because you can't survive if they do.

Hedge when it's cheap (10-20% probabilities). Take partial profits on spikes (sell 30-50% if prices triple). Keep tail risk protection in place (never go fully unhedged).

Your board will thank you when Trump's next executive order moves Section 232 tariffs 25 percentage points in 7 days—and your hedge pays $1.4M while unhedged competitors lay off 30% of staff.

Sources

Disclaimer: This content is for informational and educational purposes only and does not constitute financial, investment, or legal advice. Trading prediction markets involves risk of loss. Past performance does not guarantee future results. Consult a qualified financial advisor, tax professional, and legal counsel before making hedging or investment decisions. Ballast Markets is a product of Blink AI (https://blinklabs.ai, [email protected]). For more information, see Risk Disclosures.

Need help sizing hedges for other import scenarios? Check out our guides on China ETR hedging for importers, furniture importer case studies, and auto dealer Section 232 hedging.