Josip Obajdin, responsible for iron markets at Freight Investor Services (FIS), told during the SteelOrbis Spring '11 Conference & 64th IREPAS Meeting that strong long-term price correlations between raw and finished materials mean scrap and iron ore swaps are useful products for anyone exposed to any part of the steel complex.
According to his presentation, risk management has some benefits such as offering long-term, fixed price off-take agreements to important clients as an added-value service, increasing profit margins in a moving market by buying/selling into the futures market, reducing the cost and increasing the availability of trade financing and reducing the need for unplanned stocking and destocking. After giving some example scenarios about combining natural exposure with swaps, Mr. Obajdin mentioned some advantages of swaps over other solutions; including cash settlement - warehousing, delivery and some liquidity problems are avoided, while there is potential for lower costs, and also index settlement - settlement is guaranteed to reflect the physical market and is significantly harder to manipulate.
Obajdin concluded his presentation saying that controlling financial risks can give a competitive advantage in today's market.
Freight Investor Services develops and brokers risk management solutions to solve the financial difficulties associated with the price volatility of commodities.