It was less than five years ago,
in 2008, that AMMs 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
Its no surprise, then,
that even though the first U.S. ferrous scrap futures contract
is still in its fledgling stage, observers suggest its
just a matter of time before its 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
AMMs 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 doesnt 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.
Hedging can help mills reduce
their exposure to adverse and unpredictable price movements.
One mill buyer said that he plans to use the tool on long-term
contracts. I hope it can help when I get a lengthy
government contract; I could look out seven or eight months and
lock in a scrap price. I dont want to risk the profit of
the contract, so I can quote the government a price and buy as
many contracts as I need to cover it, he said. We
do government business and already lock in on alloys but
havent been able to lock in scrap.
The mill buyer noted that some
of his customers are intrigued by futures for similar reasons.
My customers are interested, too, and they are interested
in the same thing. They get contracts and would love to be able
to freeze their raw material price, he said.
The futures market will make
most sense in a normal environment where prices should be
elevated somewhat months down the road.
The mill buyer has been
monitoring the futures market and has set up an account but may
not need to draw upon it this year due to a bearish, uncertain
outlook. Prices have the potential to soften this year, so
there wouldnt be a need to take out futures
It is unclear where scrap prices
are headed due to the scheduled June commissioning of
Charlotte, N.C.-based Nucor Corp.s 2.5-million-ton
direct-reduced iron (DRI) facility in Louisiana. DRI is a
substitute for prime scrap. When Nucor turns on their DRI
plant in June, the scrap flow is going to get better, the
mill buyer said. There could suddenly be enough scrap for
everyone, and scrap prices could fall.
Recyclers also can hedge on
futures. When scrap plummeted in 2008, recyclers couldnt
sell their scrap at any price because mills had no orders for
finished steel. At times when material cant be sold to
mills, recyclers can sell futures forward to protect the value
of their inventory.
If a circumstance--like the
pending DRI capacity coming online from Nucor--makes a
scrapyard executive bearish, he can act on his negative view
and sell futures to protect the value of the inventory.
An executive at St. Louis-based
recycler Kataman Metals LLC said that his company has embraced
the notion. We use futures to hedge our physical scrap
trading business, Brad Clark, director of steel trading,
said. The hedging is part of business as usual and is not
driven on events like pricing volatility, he said.
The futures can be used to help
mitigate risks with its customers, Clark said. If a
supplier of scrap wanted to lock us up over the next 12 months,
we would look at futures as one source to help build up our
sales price to our customer.
Adam Weitsman, president of
Owego, N.Y.-based scrap processor Upstate Shredding LLC-Ben
Weitsman & Son Inc., said that he is playing in the futures
market to lock in margins.
Finished steel buyers can use
futures to mitigate basis risk. Thats different from
market risk, which encompasses the inherent ups and downs in
prices; rather, basis risk occurs when mills raise prices on
finished steel even though scrap prices have declined.
Basis risk can be eliminated by negotiating with a (mill)
supplier to adjust the sales price based on movement of the
scrap futures contract, Putnam said. A coil buyer
will use steel futures, but a rebar buyer can use a scrap
contract if he can negotiate to adjust his pricing based on the
movement of that index.
One challenge facing the tool is
that many people are unfamiliar with the way the contract
works. Numerous industry scrap players on the buy and sell side
are still learning that the contract is purely financial and in
no way physical. Speculators need to establish a brokerage
account for the futures trading, and no scrap is actually
A lot of scrap companies have been hedging on copper
for years, but I can see how this (concept) is new to pure-play
ferrous guys, said the owner of a Pennsylvania metal
recycler. The futures contract could become an alternate to
pricing on a to-be-determined (TBD) basis. Instead
of TBD, material could be moved out and settled on the CME
scrap price, he said.