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Future recap: Intro to CME’s scrap contract

Keywords: Tags  CME Group Inc., CME, US ferrous scrap futures contract, AMM Midwest Ferrous Scrap Index, Harriet Hunnable


This article with the headline 'The future is now' is featured in the March/April issue of American Metal Market Magazine, which will reach subscribers in early April.

As ferrous scrap prices continue to fluctuate wildly, market players in the United States--the world’s largest exporter of the key raw material--are finding it crucial to manage price risk. CME Group Inc. launched its first-ever U.S. ferrous scrap futures contract Sept. 10. The new contract, listed on the New York Mercantile Exchange (Nymex), is financially settled against AMM’s Midwest Ferrous Scrap Index for No. 1 busheling, which debuted in June and is based on tonnage-weighted transaction data.

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

The ferrous scrap futures market had a quiet month in February, even on expectations that prime scrap prices would rise in March, but mill buyers and scrapyards are still monitoring activity and setting up trading accounts on the futures contract.

The April futures contracts, which were settled on March 13, were $404 per gross ton, with offers standing at $410 per ton--stronger positions than for March, when bids were $390 per ton.

Some 199 lots representing 3,980 gross tons swapped in the first 12 days in March alone, after 50 lots representing 1,000 tons were swapped in February, above the 900 tons swapped in December, which saw the lowest interest since the contract’s launch. As of March 22, there were 4,800 gross tons of open interest through August.

The CME expects it will take some time for a fuller acceptance of the derivatives, but it believes they are needed in today’s scrap environment. “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 upon the contract’s launch. “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. “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 AMM has very good market engagement with the industry and is the right partner for us,” she said when the exchange announced last June that it had entered into a licensing agreement with AMM to utilize its new index as the basis for the exchange-traded 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 the 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 standard time) on the 10th day of each month (or the next working day if the 10th falls on a public holiday or weekend), as well as in the AMM daily issue the following day.

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, which runs in addition to existing appraised ferrous scrap prices for U.S. and Canadian cities, builds upon AMM’s extensive experience in reporting scrap prices in a wide range of grades and locations, and utilizes an established and leading index methodology.

The index 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 scrap sellers and buyers. 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.

AMM is impartial and has no financial or other interest in the level or direction of the index, and doesn’t pay any market player to participate in the index.

A complete explanation of the index pricing methodology is available here.


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