NEW YORK While
end-users have been the early adopters of steel futures, mills
also are starting to experiment with the instruments, according
to executives at the Steel Success Strategies XXVIII conference
in New York sponsored by AMM and Englewood Cliffs,
N.J.-based World Steel Dynamics Inc. (WSD).
"The producers, as
they run their tests on futures, will find that (hedging) is
not just a consumer opportunity ... but they can use it for
themselves to protect against raw material devaluation as well
as selling-price devaluation," said Patrick McCormick,
president of Englewood Cliffs-based World Steel Exchange
Marketing LLC and managing partner at WSD.
volatility in raw materials and finished product pricing should
encourage producers to hedge. "These markets are extremely
volatile, and there are many companies, whether its a
bank, a trader, a producer or a steel mill, that have to manage
risk more carefully," John Banaszkiewicz, managing director of
London-based Freight Investor Services Ltd., said.
About 60 percent of
the domestic hot-rolled coil market of about 40.5 million tons
is being sold on the basis of a floating price, meaning that
there "are a lot of people not hedging," Banaszkiewicz
Futures trading is
growing, with 30,606 hot-rolled coil contracts traded on the
Chicago Mercantile Exchange (CME) so far this year compared
with 43,867 contracts in all of 2012, according to Martin
Evans, director of metal products at Chicago-based CME Group
Inc. "That is the result of more market participants coming on
board, getting registered and trading," he said.
Mike Frawley, global
head of metals for New York-based Jefferies Bache LLC, said
that a service center selling 500,000 tons of carbon steel
annually could have avoided revenue deterioration of about $25
million, given a $100-per-ton price decline over six months, by
The adoption of steel
futures could follow a path similar to that of aluminum, where
initial resistance from producers, especially regarding price
transparency, has given way to the ubiquitous use of
"They actually thought
they set market pricing in aluminum, and then they came to
realize that the market is really setting that price," Jon
Putnam, president and chief executive officer of Roswell,
Ga.-based Standard Steel Trading Co., said. "I think there are
still some steel chief executive officers who think they set a
price independent of the marketplace. They are learning that
thats not true."
introduction of a scrap futures contract should ease some steel
producers concerns about hedging. "They found it
difficult to sell forward at fixed pricing for their output as
the input cost might move against them and squeeze their
margin. We hope weve addressed that with this contract,"
relevant to the steel industry as well as adding liquidity by
getting the financial industry interested in the market, is
"extremely important," Evans said.
Early movers in the
futures game are likely to see advantages, McCormick said.
"They will be skilled because of their early adoption. They
will be able to take advantage of the added liquidity (once
more parties enter the market)."