Market players see risk reduction with scrap futures

Mar 26, 2013 | 07:00 PM | Lisa Gordon

Tags  US ferrous scrap fdtures, CME Group Inc., No. 1 busheling, U.S. Midwest No. 1 busheling ferrous scrap futures, AMM Midwest Ferrous Scrap Index, Jonathan Putnam, Standard Steel Trading Co.,

It was less than five years ago, in 2008, that AMM’s consumer buying price for No. 1 busheling in the Chicago market plunged to $125 per ton in early November from $890 four months earlier. Short of another economic apocalypse, prices are unlikely to be this erratic, but one thing is certain: Volatility and scrap metal go hand in hand.

It’s no surprise, then, that even though the first U.S. ferrous scrap futures contract is still in its fledgling stage, observers suggest it’s just a matter of time before it’s widely accepted. Mills, buyers and metal recyclers are already setting up accounts as they embrace the risk-management tool.

Launched by Chicago-based CME Group Inc. in September, the U.S. Midwest No. 1 busheling ferrous scrap futures contract is settled based on AMM’s Midwest Ferrous Scrap Index for No. 1 busheling. Buyers can use the contract--equivalent to 20 tons of prime material--to fix their input costs. While it reduces their ability to take advantage of sweet spots when prices fall, it also eliminates their exposure to volatility.

“The whole concept of hedging is to mitigate or eliminate the primary risk of market price movement. If any buyer is incurring unknown costs to support a known sales price, he has accepted significant market risk,” said Jonathan Putnam, president and chief executive officer of Roswell, Ga.-based Standard Steel Trading Co. “A mill buyer of scrap doesn’t know what he is going to pay in the next month for scrap but has already fixed the price of (finished) steel for a quarter. If he purchased futures, he would have locked in his primary input cost and would know in advance the margin on his sales price out into the future, regardless of whether either scrap or finished prices go up or down.”....

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