NEW YORK Steel
derivatives continue to face an uphill battle as concerns over
illiquidity and price risk keep some would-be participants on
the sidelines, but advocates of the nascent products maintain
swaps and futures will find a place in the global steel sector
Once the realm of energy,
agriculture and base metals, the futures markets have been
expanded in recent years to encompass six steel
productsincluding hot-rolled coil, rebar and
billetas well as a number of related raw materials, from
iron ore to ferrous scrap.
Although some steel derivatives
have started to see tractionwith the newest product, CME
Groups No. 1 busheling futures contract financially
settled against AMMs Midwest Scrap
Index, trading more than 3,000 tons in its first full month
in existenceothers have been slow to gain acceptance in
"In the U.S., we have a lot of
difficulty with our steel community. They generally are not
inclined to be educated about the history of financial
derivatives in this country. They read headlines, and the
headlines talk about a rogue trader in London ... and they
figure they shouldnt be involved in it," Jeremy Flack,
founder and president of Cleveland-based steel distributor
Flack Steel Ltd., said during a steel swaps webinar hosted by
London-based Freight Investor Services Ltd. (FIS). "We spend a
lot of time here just getting people not to be afraid. There
are a lot of misconceptions."
According to Flackwhose
company has been vocal in its belief that service centers
should offer hedging services alongside cutting and
slittingsaid the misconceptions surrounding the use of
steel derivatives largely stems from a belief that hedging
introduces more risk into a companys trading book.
"(One) misconception is if I
lock in a price and the price goes down, I could lose. (But) if
used correctly, youre taking risk out of the equation,"
he said. "Youre not going to get rid of volatility in
hot-rolled coil. The price itself is not going to stop being
volatile if you engage in using these instruments, (but)
youll just take some price risk out of your own business.
We think the small price for the vaccine is nothing compared to
the benefit of being vaccinated."
Phillip Price, structured
products manager at Stemcor Risk Management AG, Zug,
Switzerland, a unit of London-based trading house Stemcor Ltd.,
agreed that the use of futures offers a net benefit.
"If you have any possibility to
build in the use on long-term contracts or even short-term
contracts where pricing is linked to an index, it greatly
enhances your ability to manage risk. It also gives you the
ability to have much greater forward visibility of your
business on a day-by-day basis," he said.
But despite its proponents
insistence, many physical market participantsparticularly
steel millscontinue to eye the fledgling products with
Part of that concern is tied to
liquidity concerns, FIS steel derivatives broker Sam Mehew
said. "The steel industry is so much more fragmented than the
iron ore market. Weve got about six traded steel products
out there at the moment, whereas iron ore has only one focus.
So the nature of it is all the liquidity is spread a little bit
thinly across all the six contracts. Im afraid
thats the nature of the beast, really," he said.
Nonetheless, advocates maintain
that the tide is turning.
"Were starting to see
liquidity come in on the contracts and they are building, but
they are a nascent market and weve got to start
somewhere. Its growing, and were pleased to see the
growth so far," Mehew said.
Flack agreed, noting that as
more regional banks and trading desks push to get their clients
involved in hedging, the products are expected to really take
off. "At some point, this market is going to take off like the
oil market, like the aluminum market, and you dont want
to get left behind," he said.