NEW YORK Steel, scrap and
raw materials derivatives are gradually gaining acceptance in a
metals industry struggling with unprecedented volatility, and a
more widespread use of freight derivatives may be just around
the corner, according to executives at a number of the
worlds largest brokerage and shipping firms.
The steel and shipping markets
have been swept by extreme volatility in recent years, industry
leaders said at Capital Links fourth annual Global
Derivatives Forum in New York this week, with average
hot-rolled coil prices in the United States swinging between
$580 and $750 per ton this year and shipping rates increasingly
subject to their own sharp turnarounds.
That growing volatility has
rattled the market in recent years, encouraging some
participantsparticularly on the raw materials side of the
steel equationto consider hedging their positions with
futures or against indices.
"The two big swing factors are
coal and iron," said John Banaszkiewicz, managing director of
London-based freight and commodities broker Freight Investor
Services Ltd. (FIS). "They are two-thirds of the dry bulk
market in total, and we are very keen to see those two
commodities develop into derivatives, into a liquid
Iron ore indices and swaps in
particular have gained speed in recent quarters as mills look
to stabilize their pricing exposure, but futures contracts can
also benefit consumers of finished steel products, including
automakers, said Tom Beney, Cargill Americas head of ocean
"We need to see (futures) not
only work for the steel mill as a customer but also for the
steel mills customer. And I think if we were able to do
it, wed have a huge potential," he said.
Peter Norfolk, research director
at FIS, agreed that the benefits of hedging span the supply
"Steel swaps provide price risk
management, giving miners, traders and steel end-users
certainty on margins," he told AMM in an e-mail. "We
are confident that steel swaps have massive growth potential,
and we are already seeing volumes build as more players get
But while more steel mills and
consumers are increasingly using risk-management tools in their
businesses, the trend has not yet gained much speed on the
freight derivatives front.
However, analysts predict
customers will begin to hedge shipping contracts more in coming
years in response to swings in shipping rates that can hurt
supply lines as well as shippers.
The cost to transport a
container from Hong Kong to the U.S. West Coast, for example,
has more than doubled since 2009, according to Joe Alagna, vice
president of U.S. sales at Shanghai-based China Shipping
"Its difficult for our
customers to plan their business and price their products," he
said. "By going into multiyear contracts (based on an index),
thats really what were looking for so we dont
have to go through this process."
Only about 1 percent of the
4,500 shipping contracts filed with the Federal Maritime
Commission are multiyear contracts based on an index, Alagna
"We do need indexing and we do
need help with that so we can simplify it and lengthen our
contracts," he said.