Steel futures: A way of hedging against price volatility

Tuesday, 08 April 2008 13:47:23 (GMT+3)   |  
       

"We believe that steel futures can provide steel market players with additional benefits from a financial perspective"- thus stated Sander Stuijt from ABN Amro Bank, speaking at the steel futures session of the SteelOrbis Spring 08 Conference & 58th IREPAS Meeting being held in Istanbul. According to Mr. Stuijt, when looking back at the past six months, it can be said that steel prices have almost doubled and are not likely to indicate a halt in the short term in the context of the rising main input costs, such as those of scrap, iron ore, energy and transportation. Thus volatility - the core theme throughout the conference - has never before become so significant for steel market players.

How can steel futures impact your bottom line? - A bank's perspective: Looking at the statistics for 2007 in detail, Turkey ranks in 11th place in global steel production with 25.8 million mt, accounting for a 1.9 percent share of global steel output for the year in question. With its total EAF capacity of 19.7 million mt and total BOF capacity of 6.1 million mt, flats hold just a 12 percent share in Turkey's steel output, longs hold the lion's share at 86 percent, and special steel accounts for only a two percent share. The Turkish steel industry is largely dependent on foreign trade and is the third-largest exporting sector of the Turkish economy. Moreover, Turkey is at a crossroads between major steel production and consumption areas, and benefits from the strong economic growth and steel demand in the Middle East and in Southeast Asia. This situation is valid for long products and is also potentially valid for flat products.

Since the beginning of 2003, prices for Turkish rebar and billet have been rising due to the increases in scrap prices. As a result, the prices of these steel products have become more volatile and increased volatility has also been seen in profit margins. With the existence of liquid steel futures, market players will be able to seize the possibility to hedge against the volatility of steel prices. In addition, the reference prices give the security of a maximum price for purchases and a minimum price for sales of steel.

LME steel billet futures: The LME and risk management for the steel industry: "The ones to embrace what LME steel futures offer will be the ones to have the advantage in price management"

According to LME Chief Executive Martin Abbott, the LME, as the world's leading non-ferrous exchange with 130 years of experience in the metals industry, achieved an annual turnover of $9.5 trillion and traded a volume of 2.2 billion mt in 2007. 95 percent of all non-ferrous metals futures trading is through the LME and the LME reference prices.

Emerging markets and huge shifts in production centers are destabilizing the usual steel pricing structure. It is the price volatility that is currently being experienced in steel that makes the introduction of risk management tools so important for the industry.  Futures give the industry the option of locking in a price and giving some certainty around cash flow and return on investment.

With the soft launch held on February 25, the LME has launched two regional steel billet contracts, for the Mediterranean and the Far East: Turkey and Dubai are the proposed delivery locations for the former and South Korea and Malaysia are the proposed delivery locations for the latter. Trading is available initially on the Exchange's electronic platform, LME Select, and on the telephone market. So far, 14 producers have listed their brands: RUE Byelorussian Steel Works (BMZ), Hellenic Halyvourgia S.A., Ann Joo Steel Berhad, Open Joint Stock Company Amurmetal, Frolovsky Electrostaleplavilny Zavod (ZAO Volga-FEST), Joint Stock Company Zlatoust Metallurgical Works (ZMZ), Colakoglu Metalurji A.S., Diler Demir Celik Endustri ve Ticaret A.S., Ekinciler Demir ve Celik Sanayi, Yazici Demir Celik Sanayi ve Turizm Ticaret A.S., CJSC Ministeel mill ISTIL, Izmir Demir Celik Sanayi Sanayi A.S. (IDC Aliaga), and Mechel Chelyabinsk Metallurgical Plant (Chelyabinsk Metallurgical).

Billets are the preference of the Exchange as they are easily and relatively cheaply stored, unlike other steel end-products. Billets are not as prone to being damaged and can therefore remain in storage for an indefinite period of time. In order to build liquidation, said Abbott, patience, stamina and commitment are required as the Exchange does not expect an immediate huge trading volume once the hard launch has been held on April 28, not until the system and the administration of the futures have been fully tested.

As regards the pace taken by the Dubai Gold and Commodities Exchange (DGCX) so far, it was stated during the question and answer session that liquidity had almost disappeared at the DGCX at Christmas time and is now currently being rebuilt. Although the DGCX is a bit further ahead in terms of having realized its first delivery, it was said that for the LME the two exchanges are not competitors. It was added that all steel futures exchanges have their place in the steel industry, especially given the existence of price volatility.


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