1. 2016 ISRI GULF COAST CHAPTER
SUMMER CONVENTION & EXPO
www.thesteelindex.com
Coming Out On Top – Hedging Strategy
Kurt Fowler
Regional Manager, Americas
The Woodlands Waterway Marriott
June 24, 2016
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3. Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives – Scrap
- Indexing & Price Risk Management
4. Immediate Impact of Brexit
GOLD
Living up to its reputation as a safe haven asset following a plunge in markets and currencies Friday, gold soared 8%,
or $100, to a 2.5-year high of $1,359/oz overnight, before easing to around $1,320/oz by midday. In sterling, the price
of gold soared nearly 20% to GBP 1,000/oz.
OIL
Oil prices moved sharply lower on heightened concerns about the global economy. However some commentators
played down the long-term impact on oil markets, as the UK itself entered what could be a prolonged period of
uncertainty.
STEEL
The UK's Brexit vote will have a bigger impact on the country's own sector than on the global steel marketplace. The
Brexit decision led to much talk about Tata Steel's sale of its UK assets. The Indian conglomerate--whose shares
slipped over 9% in Mumbai Friday morning--put its lossmaking UK subsidiary up for sale in March, but was co-opted
by the government to postpone the sale until after the referendum.
Since then market chatter has suggested it may retain its large Port Talbot plant in Wales, while selling smaller more
profitable units.
5. Immediate Impact of Brexit
CARBON EMISSION AND POWER
The biggest market reaction across the power-related energy complex was felt in the carbon market amid
uncertainty about the UK's future participation in the European emissions trading scheme with EUA carbon
allowances crashing up to 17% from Thursday's close to trade at Eur4.91/mt by 13:30 London time.
NATURAL GAS
UK wholesale natural gas prices were highly volatile during early Friday trading as traders filtered the effect of Brexit
into NBP contracts, with strong bullish momentum from the pound crashing against the euro more than
covering oil price losses.
COAL
The CIF ARA year-ahead thermal coal futures contract saw a flurry of trading activity before the European trading
window opened, with prices opening at $53.50/mt, $3.50 lower than Thursday's close, before falling to
$53/mt.
LNG
The global LNG market had yet to react to Brexit, trading sources said Friday. The Platts JKM was unchanged from
Thursday's close of $5.35/MMBtu,despite gaining since the start of the week.
6. Introduction: Definitions
• Speculation Daniels Trading
– Investment in Stocks, Property, or other Ventures in the hope of
gain but with the risk of loss.
– Speculators are people who analyze and forecast futures price
movement, trading contracts with the hope of making a profit.
• Hedger (Hedging) Financial Dictionary
– An investor who takes steps to reduce the risk of an investment by
making an offsetting investment. In general, they are either
producers or users of the commodity or financial product
underlying the contract. Their goal is to protect their profit and
limit their expenses.
7. Introduction: Hedge vs Speculation
• Hedger vs. Speculator Daniels Trading
– All people who trade futures contracts are not speculators. People
who buy and sell the actual commodities can use the futures
markets to protect themselves from commodity prices that move
against them. They’re called hedgers.
8. Where are we now…..
…..A different view (5 year)
TSI Indices 2011 2016 +/(-)
US HRC $ 691 $ 620 (10%)
ASEAN Imports HRC 677 340 (50%)
US Shredded Scrap 407 250 (39%)
Turkish Import HMS 1/2 80:20 452 220 (51%)
62% Iron Ore 151 51 (66%)
Source: The Steel Index, June 24, 2016
9. Where are we now…..
…..A different view (1 year)
TSI Indices 2015 2016 +/(-)
US HRC $ 466 $ 620 33%
ASEAN Imports HRC 358 340 (5%)
US Shredded Scrap 281 250 (11%)
Turkish Import HMS 1/2 80:20 272 220 (19%)
62% Iron Ore 62 51 (18%)
Source: The Steel Index, June 24, 2016
10. Trend over the last two years….
US HRC
US Shred
Turkish HMS
11. ABOUT THE STEEL INDEX (TSI)
An international pricing service, dedicated
to the iron and steel market. Founded in
2006; pricing the iron ore spot market
since 2008. Pioneer of transaction-based
pricing for ferrous markets.
• Index used as the settlement price for
over 99% of cash-settled iron ore
derivatives.
• TSI scrap indices used by NASDAQ, LCH
and LME.
• Physical benchmark in coking coal, as
well as a growing market for
derivatives.
Steel Iron Ore
ScrapCoking Coal
TSI provides transaction-based spot
prices for the whole ferrous value
chain…
12. Methodology
TSI “Data Providers” submit spot
transaction data to TSI under
confidentiality agreement
Physical market participants only (over
650 registered)
Representatives from all relevant points of
the supply chain, buy and sell sides
Submission direct to TSI database
through secure on-line channel
Data normalised and “cleaned” before
volume-weighted averages calculated for
the day or week
Legal
Agreement
Submits price data
through a secure
online system
Transaction
data sample
Prices
normalised1
Outliers &
high/low
excluded
2 Buy/Sell
balance3
Volume–weighted
averages calculated4 Final
data set
TSI Prices Published
13. Ferrous Derivatives
Scrap:
• LME
• LCH.Clearnet
• CME Clearing
Europe
• Borsa Istanbul
• NASDAQ
S&P Global Platts & TSI’s benchmark indices are widely used for
the settlement of futures and derivatives contracts
Steel :
• LCH.Clearnet
• CME Clearing Europe
• Singapore Exchange
(SGX)
• NASDAQ
Iron ore:
• Singapore
Exchange (SGX)
• CME Group
• LCH.Clearnet
• NASDAQ OMX
Coking Coal:
• Singapore
Exchange (SGX)
14. Agenda
- Introduction
- Index Linking – The Initial Frontier
- Pricing: The Return of Volatility
- Imports & Trade Cases
- Volatility is back
15. Index Users
Physical market users include steel mills, miners, scrap yards, traders, distributors, service
centres, steel processors and steel consumers
Physical market players use TSI & S&P Global Platts prices in a variety of ways, including:
- for reference in price negotiations
- to track performance against the market
- for benchmarking
- as escalators and in clauses within supply/purchase contracts, triggering a price
adjustment or renegotiation if the index moves by more than a defined amount
- to identify opportunities to take trading positions
- in index-linked pricing arrangements
- for hedging physical price exposure (locking in future revenues, costs or margins)
- for speculation (traders)
Financial market users include brokers, banks and exchanges
16. Indexing and Hedging – Dispelling the Myths!
Indexing does not commoditize products as it allows for preferences to be built into the
index price.
If material produced is considered a value-added product then it can be sold at a premium
fixed value or a percentage to the index value.
Discounts or premiums can be built in to the index price for credit lines, or any number of
commercial terms buyers or sellers value.
Using futures/derivatives contracts as a price risk management tool is not speculative
measure!
On the contrary, it carries a myriad of benefits to users throughout the steel supply chain. It
allows for forward planning, fixed price certainty and (certainty) of cash flows as well as an
efficient allocation of capital resources.
17. Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
18. Iron Ore – Paving the Way
0
20
40
60
80
100
120
140
160
180
0
200
400
600
800
1,000
1,200
2009 2010 2011 2012 2013 2014 2015
Other Volume Cleared*
SGX Volume Cleared
SGX Open Interest (RHS)**
** End of Year * CME Group, LCH.Clearnet, NOS Clearing
Source: The Steel Index (TSI)
Iron Ore OTC Derivatives Contracts - Volume Cleared and Open Interest (million tonnes)
Iron ore derivatives have seen phenomenal growth, doubling in size
every year
19. Iron Ore – Paving the Way
0
20
40
60
80
100
120
140
160
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Millions
Chinese Iron ore imports Iron ore derivatives volumes
Source: GTIS, SGX, CME Group
20. Iron Ore – Joined by other contracts
2009: First
cleared iron
ore swap
2012: Iron ore
options on
swaps
2013: Iron ore
futures
ASEAN HRC
swaps and
futures.
SGX Coking coal
swaps and
futures.
2014: SGX
launches options
on iron ore
futures
2015:
58% Fe iron ore
swaps & futures
(TSI & MB)
Ion ore lump
premium
(Platts LP)
Scrap futures
on Istanbul
Bursa
2016:
US Shredded
scrap (TSI)
contract
LME scrap (TSI)
and rebar
(Platts)
26. Iron Ore - Summary
• Unexpected surge in iron ore prices so far in 2016
• Iron ore cited as “best performing commodity”
this year
• Rio, BHP Billiton & Vale all cut production
guidance
• China “opens the taps” – record levels of credit
creation
• NPC in March sees emphasis on stimulus and
short-term (i.e. steel-intensive) growth, rather
than supply-side reform
• Strong seasonal steel demand in China meets
limited supply: steel stockyards empty
• Uncertainty over policy direction in China.
27. Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
29. Why Turkey?
Turkey is the single largest importer of ferrous scrap and the region acts as a genesis for
pricing
Steel production via the secondary route (EAF-based), using scrap as a raw material
feedstock
Turkish scrap import prices influence other key scrap trading regions such as the domestic
US Midwest, Taiwanese and Indian containerized imports
0
2
4
6
8
10
12
Ukraine Russia UK USA Rest of the world
MillionMT
2013 2014 2015
Turkish Scrap Imports
30. Key Global Scrap Exports 2015 (million tonnes)
Imports from diversified sources around the world but largely originate from US East Coast,
Europe/Scandinavia (deep-sea) and Baltic regions (short-sea)
1.09
1.15
0.68
1.62
0.99
1.43
1.10
8.08
3.97
31. US Scrap Exports
0
1
2
3
4
5
6
7
India Mexico South Korea Taiwan Turkey Rest of the World
MillionMT
2013 2014 2015
The US is the single largest exporter in the world. Three inter-related scrap regions…Midwest (domestic),
East Coast (exports to Turkey) and West Coast (exports to Asia)
Purchasing patterns in Turkey (as a bulk buyer) have a knock-on impact on scrap pricing in both the
Midwest and containerised markets such as Taiwan and India
32. Virgin Iron versus Bulk Scrap
1
1.5
2
2.5
3
3.5
4
170
220
270
320
370
420
470
520
570
US$/tonne
Scrap HMS #1&2 80:20 Ratio (RHS)
Despite recent price falls, scrap is more than three times the cost of iron ore per unit of Fe
While Turkey’s EAF steelmakers cannot directly switch between scrap and iron ore, it may sometimes be
more cost effective for them to re-roll semi-finished steel (billet) into rebar than melt scrap (i.e. the
displacement effect)
33. NASDAQ OMX Scrap Futures
Launched November 2015 alongside LME’s Steel
Rebar contract (settled basis Platts)
Cash-settled futures contract with a 12-month
forward curve and a lot size of 10 tonnes
~40,000 tonnes (4,000 lots) traded since launch
“Based on the development so far, Stemcor feel these launches have been the most successful in the
commodities space since iron ore swaps.”
Phillip Price, Head of Market Risk Management and Derivatives Trading at Stemcor
First voice-brokered trade executed in May by INTL FCStone Ltd on behalf of
Stemcor – indicating contracts are being accepted as risk management tools for
the steel industry
35. LME Forward Curve
100
150
200
250
300
350
May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17
US$/tonne
Turkish Imports HMS 1&2 80:20, CFR Turkish Port
US Domestic Shredded, Delivered Mill
Indian Imports, Shredded, CFR Port
Taiwan imports HMS 1&2 80:20, CFR Port
Forward Curve
36. NASDAQ Scrap Futures
Expected to be launched in late Q3 2016.
Cash-settled futures contract with a 12-month
forward curve and a lot size of 20 gross tons
To be settled basis TSI 10-day shredded index.
Reference Product:
Shredded obsolete scrap ISRI codes 210–212 inclusive. Homogenous iron and steel scrap,
magnetically separated. Originating from automobiles, unprepared No. 1 and No. 2 steel,
miscellaneous baling and sheet scrap. Average density 60 (50–70) pounds per cubic foot.
Pricing Point: Delivered US Midwest Mill (Ohio, Illinois, Indiana & bordering vicinities)
Currency: US$
Volume Unit: Long Ton
37. Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
38. The Return of Spot Price Volatility
Source: TSI
220
260
300
340
380
420
460
500
540
Jan13
Apr13
Jul13
Oct13
Jan14
Apr14
Jul14
Oct14
Jan15
Apr15
Jul15
Oct15
Jan16
Apr16
N. Europe S. Europe
€314/t
€276/t
€423/t
€426/t
European HR Coil Prices (€/tonne)
HRC prices recovered from lows
reached at the end of 2015
High price volatility prevails,
creating uncertainty for all involved
in the steel supply chain
100
58
100 109
86
57
129
145
2013 2014 2015 2016 YTD
260
300
340
380
420
460
500
540
N. Europe S. Europe
40. How Can I Learn More?
http://www.platts.com/events/americas/steel-training-chicago/index
41. Senior Leadership Team
Vaseem Karbhari
London
Regional Head, EMEA
Office: +44-20-7176-7657
Email: v.karbhari@spglobal.com
Oscar Tarneberg
Shanghai
Regional Head, APAC
Office: +86-139-1788-4804
Email: o.tarneberg@spglobal.com
Steven Randall
London
Global Metals Sector Head, Platts & TSI
Office: +44-20-7176-7649
Email: randall@spglobal.com
Tim Hard
Singapore
TSI Managing Director
Office: +65-6530-6413
Email: hard@spglobal.com
Kurt Fowler
Pittsburgh
Regional Head, Americas
Office: +1-412-431-0584
Email: k.fowler@spglobal.com
