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CME launches first US ferrous scrap futures contract

Keywords: Tags  CME Group, Nymex, CME Globex, CME ClearPort, U.S. ferrous scrap futures, Harriet Hunnable, No. 1 heavy melting scrap, No. 1 busheling AMM Staff

Facing wildly fluctuating scrap prices, the need to manage price risk is no more evident than in the United States, the world’s largest exporter of the key raw material. To that end, CME Group Inc. on Sept. 10 launched its first-ever U.S. ferrous scrap futures contract. The new contract, listed on the New York Mercantile Exchange (Nymex), will be financially settled against AMM’s Midwest Ferrous Scrap Index for No. 1 busheling, which was launched in June based on tonnage-weighted transaction data.

The CME’s new contract, available for trading on CME Globex and for submission for clearing through CME ClearPort beginning with the October 2012 contract month, is intended to provide steelmakers and other market participants in the United States and around the world a way to mitigate their pricing risk for raw materials, according to the Chicago-based exchange.

“Today, the global steel industry relies on the U.S. to supply more than 20 percent of its ferrous scrap needs, making it the biggest exporter of this important raw material to the industry,” Harriet Hunnable, CME managing director of metal products, said in a statement. “Continued demand for U.S. scrap and increased price volatility in ferrous products underscore the need for an effective tool to enable price risk management throughout the entire supply chain, from raw materials to finished steel products. In addition to being an efficient risk-management tool for regional industry participants, we firmly believe our U.S. Midwest scrap futures contract has the potential to become a global benchmark for price discovery and managing volatile input prices.”

Ferrous scrap “has become one of the most volatile raw materials for steelmakers,” Hunnable said earlier this year. “Price correlations between scrap, iron ore and steel are no longer high enough to manage price risk in scrap. ... Volatility will be a major issue for this market. Scrap is one of the first pricing indicators for the U.S. steel industry. For producers, steel scrap can make up between 45 and 85 percent of raw material costs. Being able to better manage this cost would really help them manage their risk.”

The CME believes the AMM index “is very robust and that AMM has very good market engagement with the industry and is the right partner for us,” she said when the exchange announced in June that it had entered into a licensing agreement with AMM to utilize its new index as the basis for the exchange-traded ferrous scrap futures contract.

AMM’s Midwest Ferrous Scrap Index lists monthly index prices for three grades: No. 1 heavy melting scrap, No. 1 busheling scrap and shredded steel scrap. The index is quoted in U.S. dollars per gross ton, delivered to the mill, for the three grades, which are based on Institute of Scrap Recycling Industries 2012 specifications.

The index—developed to provide a fair, transparent and objective representation of the market—is published online at 4 p.m. (Eastern time) on the 10th of each month—or the next working day if the 10th falls on a public holiday or weekend—as well as in the daily newspaper the following day.

The index runs in addition to the existing appraised ferrous scrap prices for U.S. and Canadian cities and is calculated based on transaction data received that is then tonnage-weighted and normalized to produce a final index value.

The index opened in June at $343.38 per ton for No. 1 heavy melting scrap, $381.96 per ton for No. 1 busheling and $376.03 per ton for shredded steel scrap. Those prices fell by around $45 in July but rebounded the following month to $377.76 per ton for No. 1 heavy melt, $418.26 per ton for No. 1 busheling and $408.73 per ton for shredded scrap before slipping in September to $357.75 per ton for No. 1 heavy melt, $391.06 per ton for No. 1 busheling and $387.35 per ton for shredded.

AMM, the leading independent supplier of market intelligence and pricing to the North American metal industries and publisher of widely used reference prices for scrap, has been reporting on the U.S. scrap market for more than 100 years and therefore has a unique level of experience and knowledge in providing benchmark prices to the industry.

The Midwest Ferrous Scrap Index builds upon the publication’s extensive experience in reporting scrap prices in a wide range of grades and locations, and utilizes an established and leading index methodology.

The AMM index methodology is a tonnage-weighted calculation of transactions that have been normalized to a base specification using value-in-use curves as defined by the market. This methodology aims to use the input of high-quality data. The index is based on actual transactions reported to AMM by any market participant who is conducting trades on a delivered-Midwest-mill basis, and isn’t restricted to a panel or selected group. The Midwest Ferrous Scrap Index also utilizes aggregate transaction data, where available, in order to maximize the proportion of the market represented in the final index.

The index consists of two sub-indices, based on data received from sellers and buyers of scrap. The sub-indices are each based on a tonnage-weighted average of the normalized trade information, and the two indices are combined with equal weighting to ensure that the market is fairly represented across all participants. Only the final index is published. A complete explanation of the index pricing methodology is available at AMM’s website.

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