In the six months since CME
Group Inc. launched a U.S. ferrous scrap futures contract, more
than 20,000 tons have been traded in more than 1,000 contracts.
Whether that is considered impressive or inconsequential
depends on the comparison and the time frame.
Against other ferrous futures,
its a tiny number. Hot-rolled coil, for example, saw
130,000 tons traded in February--but, in fairness, the
hot-rolled contract is five years old and didnt trade at
all in its first six months; compared with that, the scrap
contract is a hit out of the box.
The CME has traded a Turkish
scrap contract for quite some time, and Cleartrade Exchange Pte
Ltd. in Singapore also trades a Turkish scrap contract.
Given its role in what the CME
calls the virtual steel mill, where hedgers and speculators can
trade some or all of the commodities in the steel supply chain,
the question of the place for a scrap futures contact seems to
be when, not whether. That said, there remains an industry
education challenge for the exchanges that trade futures, not
just in scrap but all ferrous contracts, in convincing mines
and mills of the utility of financial risk management.
The scrap contract has
grown in line with our expectations since the launch in
September, said CME director of metals research and
product development Young-Jin Chang. It is a very new
contract, and still the gains so far make it a great success.
We see scrap catching up quickly with (hot-rolled coil) and
other ferrous contracts.
Any broker registered to trade
on Nymex or Comex can work with the new contract, she said, but
noted that there are only about a dozen brokers currently
specializing in the market. So far, the primary users of the
CME scrap contracts have been traders, service centers and
processors rather than mills, Chang said. We are seeing
new entrants using that contract, especially those participants
that already trade other ferrous contracts. We see people
trying a few contracts at a time, 100 tons here or there, to
get the feel of it.
The CME has put some market
development effort behind the new contract, including a
presentation at AMMs 6th annual Steel Scrap
Conference in Philadelphia last November. That
presentation was one of the best attended at the
conference, Chang said. We are participating in as
many speaking opportunities and workshops as we can. Our next
step to continue the education process is to reach out to
mills, processors and traders.
That likely will remain a
challenge for some time. Thomas Danjczek, president of the
Steel Manufacturers Association, is careful to stress that as
an organization his group doesnt advocate one method of
risk management over another. We say let the market work.
The market can decide on real solutions to real industry
problems, he said.
Anecdotally, however, Danjczek
said the challenge for many of our member companies is to
understand the value proposition for some of these instruments.
If the mill has to assume the risk in the end anyway, then why
pay for someone else to do that? It has not been clear who
takes the risk and who pays for it. Most of my members can do a
one-year (bilateral) contract based on the same index as the
Danjczek reiterated that he
isnt for or against any risk-management tool, but the
association has been following the development of futures
trading. We are waiting to see what kind of traction it
gets, how it affects supply and demand, what regulations are in
place. If there is traction, it will probably start overseas.
Here, today, the producer is still a partner with the supplier.
They dont necessarily want anything in between
that, he said.
In contrast, traders do seem to
be taking up the new contracts.
We buy steel and
scrap, Bradley Clark, director of steel trading at
Kataman Metals LLC, St. Louis, said. We hold inventory
and we hedge that, so we use all the tools available to us. We
use the HRC (hot-rolled coil) and the scrap contract to offer
customers solutions they would not otherwise get, but on its
own the scrap contract will take several years to take off.
Look at iron ore: it took about 10 years, but it was a real
He offered the analogy of
drybulk freight. Freight was oversupplied and depressed
for about 50 years, Clark said. Around 2005, when
China started to build its infrastructure, freight went through
the roof. But the shippers--grain, coal, iron ore--had
experience in the futures market because of the underlying
commodities so they were able to use hedging.
In contrast, some mills and
yards are more comfortable with their bilateral contractual
business models and are less familiar with hedging on an
exchange, but Clark believes that will change over time.
People note that the HRC
contact is doing well, he said. But it is not just
after five years; there were two years of development before
that. So figure seven years for the new scrap contract or
others on different exchanges. Its like a dance. The more
people on the floor, the more want to come on the floor. But
just having a few people out there dancing their heads off can
sometimes be a hindrance.
Cleartrade Exchange includes a
Turkish scrap contract in its basket of ferrous metal
contracts, clearing through LCH.Clearnet. The ferrous metal
portfolio also includes northern and southern European steel,
62-percent iron ore fines and Chinese hot-rolled coil and
rebar, settled against the Cleartrade Exchange China Steel
Index (CCSI), priced in U.S. dollars and available to
international customers who want price exposure to futures
contracts traded in yuan on the Shanghai Futures Exchange. The
CCSI is a daily price index developed in partnership with China
United Steel/United Metal Network based in Beijing.
In March, the exchange completed
a private placement to increase capital and diversify its
investor base to include more users. We have a potential
new board of directors, Cleartrade Exchange chief
executive officer Richard Baker said. More than 80
participants came in for the offering, which was very important
for us to get new scale and new, wise heads.
The timing was propitious, as
traders struggle to manage new financial regulations, Baker
said. When (the) Dodd-Frank (Wall Street Reform and
Consumer Protection Act) came into effect in October 2012,
quite a lot of players got caught out. Some found themselves
unable to trade. Now they know that it is all real and it is
all here to stay.
While Bakers exchange
handles many commodities, he has a soft spot for ferrous,
having a background in steel sheet. As we try to support
and educate the industry, we see a lot of synergy between the
risk-management tools and the supply chain systems they have
been investing in. Some of the smaller guys are definitely
moving quickly on all of this, and that may give them something
of an advantage if the bigger operators are not yet
A new entry in the U.S.
commodity trading and risk-management business is Indias
Eka Software Solutions Pvt Ltd. We have several customers
in Europe and one in the U.S. using our system through the life
cycle of scrap to decide when to melt and when not to,
Eka Software founder and chief executive officer Manav Garg
said. The Bangalore-based company has offices in Norwalk,
Conn., London and Sydney.
The only way to hedge without a
specific scrap contract is by the so-called dirty hedge, where
a basket of correlated contracts are used as a proxy, Garg
said. There have been long cycles of highs and lows in scrap
and steel, but not so much volatility.
Without volatility you get
comfortable in your position, he said. Uptake is
slow for all risk-management tools. People are not used to
these things, and they need a lot of education. But what is
driving all of it is volatility well beyond historic