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2016 ISRI GULF COAST CHAPTER SUMMER CONVENTION & EXPO
www.thesteelindex.com
Coming Out On Top – Hedging Strategy
Kurt Fowler Regional Manager, Americas The Woodlands Waterway Marriott June 24, 2016
DISCLAIMER
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Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives – Scrap
- Indexing & Price Risk Management
Immediate Impact of Brexit
GOLD
Living up to its reputation as a safe haven asset following a plunge in markets and currencies Friday, gold soared 8%, or $100, to a 2.5-year high of $1,359/oz overnight, before easing to around $1,320/oz by midday. In sterling, the price of gold soared nearly 20% to GBP 1,000/oz.
OIL
Oil prices moved sharply lower on heightened concerns about the global economy. However some commentators played down the long-term impact on oil markets, as the UK itself entered what could be a prolonged period of uncertainty.
STEEL
The UK's Brexit vote will have a bigger impact on the country's own sector than on the global steel marketplace. The Brexit decision led to much talk about Tata Steel's sale of its UK assets. The Indian conglomerate--whose shares slipped over 9% in Mumbai Friday morning--put its lossmaking UK subsidiary up for sale in March, but was co-opted by the government to postpone the sale until after the referendum.
Since then market chatter has suggested it may retain its large Port Talbot plant in Wales, while selling smaller more profitable units.
Immediate Impact of Brexit
CARBON EMISSION AND POWER
The biggest market reaction across the power-related energy complex was felt in the carbon market amid uncertainty about the UK's future participation in the European emissions trading scheme with EUA carbon allowances crashing up to 17% from Thursday's close to trade at Eur4.91/mt by 13:30 London time.
NATURAL GAS
UK wholesale natural gas prices were highly volatile during early Friday trading as traders filtered the effect of Brexit into NBP contracts, with strong bullish momentum from the pound crashing against the euro more than
covering oil price losses.
COAL
The CIF ARA year-ahead thermal coal futures contract saw a flurry of trading activity before the European trading window opened, with prices opening at $53.50/mt, $3.50 lower than Thursday's close, before falling to
$53/mt.
LNG
The global LNG market had yet to react to Brexit, trading sources said Friday. The Platts JKM was unchanged from Thursday's close of $5.35/MMBtu,despite gaining since the start of the week.
Introduction: Definitions
• Speculation Daniels Trading
– Investment in Stocks, Property, or other Ventures in the hope of gain but with the risk of loss.
– Speculators are people who analyze and forecast futures price movement, trading contracts with the hope of making a profit.
• Hedger (Hedging) Financial Dictionary
– An investor who takes steps to reduce the risk of an investment by making an offsetting investment. In general, they are either producers or users of the commodity or financial product underlying the contract. Their goal is to protect their profit and limit their expenses.
Introduction: Hedge vs Speculation
• Hedger vs. Speculator Daniels Trading
– All people who trade futures contracts are not speculators. People who buy and sell the actual commodities can use the futures markets to protect themselves from commodity prices that move against them. They’re called hedgers.
Where are we now…..
…..A different view (5 year)
TSI Indices 2011 2016 +/(-)
US HRC $ 691 $ 620 (10%)
ASEAN Imports HRC 677 340 (50%)
US Shredded Scrap 407 250 (39%)
Turkish Import HMS 1/2 80:20 452 220 (51%)
62% Iron Ore 151 51 (66%)
Source: The Steel Index, June 24, 2016
Where are we now…..
…..A different view (1 year)
TSI Indices 2015 2016 +/(-)
US HRC $ 466 $ 620 33%
ASEAN Imports HRC 358 340 (5%)
US Shredded Scrap 281 250 (11%)
Turkish Import HMS 1/2 80:20 272 220 (19%)
62% Iron Ore 62 51 (18%)
Source: The Steel Index, June 24, 2016
Trend over the last two years….
US HRC
US Shred
Turkish HMS
ABOUT THE STEEL INDEX (TSI)
An international pricing service, dedicated to the iron and steel market. Founded in 2006; pricing the iron ore spot market since 2008. Pioneer of transaction-based pricing for ferrous markets.
• Index used as the settlement price for over 99% of cash-settled iron ore derivatives.
• TSI scrap indices used by NASDAQ, LCH and LME.
• Physical benchmark in coking coal, as well as a growing market for derivatives.
Steel Iron Ore
Scrap Coking Coal
TSI provides transaction-based spot prices for the whole ferrous value chain…
Methodology
TSI “Data Providers” submit spot transaction data to TSI under confidentiality agreement
Physical market participants only (over 650 registered)
Representatives from all relevant points of the supply chain, buy and sell sides
Submission direct to TSI database through secure on-line channel
Data normalised and “cleaned” before volume-weighted averages calculated for the day or week
Legal Agreement
Submits price data through a secure
online system
Transaction data sample
Prices normalised 1
Outliers & high/low excluded
2 Buy/Sell balance 3
Volume–weighted averages calculated 4 Final
data set
TSI Prices Published
Ferrous Derivatives
Scrap:
• LME
• LCH.Clearnet
• CME Clearing Europe
• Borsa Istanbul
• NASDAQ
S&P Global Platts & TSI’s benchmark indices are widely used for the settlement of futures and derivatives contracts
Steel :
• LCH.Clearnet
• CME Clearing Europe
• Singapore Exchange (SGX)
• NASDAQ
Iron ore: • Singapore
Exchange (SGX) • CME Group • LCH.Clearnet • NASDAQ OMX Coking Coal: • Singapore
Exchange (SGX)
Agenda
- Introduction
- Index Linking – The Initial Frontier
- Pricing: The Return of Volatility
- Imports & Trade Cases
- Volatility is back
Index Users
Physical market users include steel mills, miners, scrap yards, traders, distributors, service centres, steel processors and steel consumers
Physical market players use TSI & S&P Global Platts prices in a variety of ways, including:
- for reference in price negotiations
- to track performance against the market
- for benchmarking
- as escalators and in clauses within supply/purchase contracts, triggering a price adjustment or renegotiation if the index moves by more than a defined amount
- to identify opportunities to take trading positions
- in index-linked pricing arrangements
- for hedging physical price exposure (locking in future revenues, costs or margins)
- for speculation (traders)
Financial market users include brokers, banks and exchanges
Indexing and Hedging – Dispelling the Myths!
Indexing does not commoditize products as it allows for preferences to be built into the index price.
If material produced is considered a value-added product then it can be sold at a premium fixed value or a percentage to the index value.
Discounts or premiums can be built in to the index price for credit lines, or any number of commercial terms buyers or sellers value.
Using futures/derivatives contracts as a price risk management tool is not speculative measure!
On the contrary, it carries a myriad of benefits to users throughout the steel supply chain. It allows for forward planning, fixed price certainty and (certainty) of cash flows as well as an efficient allocation of capital resources.
Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
Iron Ore – Paving the Way
0
20
40
60
80
100
120
140
160
180
0
200
400
600
800
1,000
1,200
2009 2010 2011 2012 2013 2014 2015
Other Volume Cleared*
SGX Volume Cleared
SGX Open Interest (RHS)**
** End of Year * CME Group, LCH.Clearnet, NOS Clearing Source: The Steel Index (TSI)
Iron Ore OTC Derivatives Contracts - Volume Cleared and Open Interest (million tonnes)
Iron ore derivatives have seen phenomenal growth, doubling in size
every year
Iron Ore – Paving the Way
0
20
40
60
80
100
120
140
160
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Mill
ion
s
Chinese Iron ore imports Iron ore derivatives volumes
Source: GTIS, SGX, CME Group
Iron Ore – Joined by other contracts
2009: First cleared iron ore swap
2012: Iron ore options on swaps
2013: Iron ore futures
ASEAN HRC swaps and futures.
SGX Coking coal swaps and futures.
2014: SGX launches options on iron ore futures
2015:
58% Fe iron ore swaps & futures (TSI & MB)
Ion ore lump premium
(Platts LP)
Scrap futures on Istanbul Bursa
2016:
US Shredded scrap (TSI) contract
LME scrap (TSI) and rebar (Platts)
IRON ORE: PAPER OVERTAKES PHYSICAL MARKET IN SIZE
0
20
40
60
80
100
120
140
160
Ma
r-11
Ju
n-1
1
Se
p-1
1
De
c-1
1
Ma
r-12
Ju
n-1
2
Se
p-1
2
De
c-1
2
Ma
r-13
Ju
n-1
3
Se
p-1
3
De
c-1
3
Ma
r-14
Ju
n-1
4
Se
p-1
4
De
c-1
4
Ma
r-15
Ju
n-1
5
Se
p-1
5
De
c-1
5
Mil
lio
n t
on
ne
s
Iron ore seaborne trade (3mma)
Iron ore derivatives (3mma)
Sources: TSI, SGX, CME Group, GTIS
0
200
400
600
800
1000
1200
1400
1600
2011 2012 2013 2014 2015
Mil
lio
n t
on
ne
s
Seaborne trade Derivatives trade
Annual comparison Monthly comparison
FLOWER SHOW TRIGGERS IRON ORE RALLY
CHINA SUDDENLY SHORT OF STEEL?
MINERS, MILLS ENTER THE DERIVATIVES MARKET…
THE DCE ROLLERCOASTER
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
200
250
300
350
400
450
500
550
20
15/0
1/0
6
20
15/0
2/0
6
20
15/0
3/0
6
20
15/0
4/0
6
20
15/0
5/0
6
20
15/0
6/0
6
20
15/0
7/0
6
20
15/0
8/0
6
20
15/0
9/0
6
20
15/1
0/0
6
20
15/1
1/0
6
20
15/1
2/0
6
20
16/0
1/0
6
20
16/0
2/0
6
20
16/0
3/0
6
20
16/0
4/0
6
DCE 20 day volatility
DCE close
Linear (DCE 20 day volatility)
“Average tenure of iron ore contract on DCE is 4 hours”
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Oc
t-13
De
c-1
3
Fe
b-1
4
Ap
r-14
Ju
n-1
4
Au
g-1
4
Oc
t-14
De
c-1
4
Fe
b-1
5
Ap
r-15
Ju
n-1
5
Au
g-1
5
Oc
t-15
De
c-1
5
Fe
b-1
6
Ap
r-16
DCE: OI as % of trade
Commonwealth Bank of Australia
Iron Ore - Summary
• Unexpected surge in iron ore prices so far in 2016
• Iron ore cited as “best performing commodity” this year
• Rio, BHP Billiton & Vale all cut production guidance
• China “opens the taps” – record levels of credit creation
• NPC in March sees emphasis on stimulus and short-term (i.e. steel-intensive) growth, rather than supply-side reform
• Strong seasonal steel demand in China meets limited supply: steel stockyards empty
• Uncertainty over policy direction in China.
Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
TSI Daily Turkish Scrap Benchmark Price
150
170
190
210
230
250
270
290
310
330
350
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16
US
$/t
Turkish HMS 1&2 80:20 Daily Index
Daily Normalised Price Submissions
Why Turkey?
Turkey is the single largest importer of ferrous scrap and the region acts as a genesis for pricing
Steel production via the secondary route (EAF-based), using scrap as a raw material feedstock
Turkish scrap import prices influence other key scrap trading regions such as the domestic US Midwest, Taiwanese and Indian containerized imports
0
2
4
6
8
10
12
Ukraine Russia UK USA Rest of the world
Mil
lio
n M
T
2013 2014 2015
Turkish Scrap Imports
Key Global Scrap Exports 2015 (million tonnes)
Imports from diversified sources around the world but largely originate from US East Coast, Europe/Scandinavia (deep-sea) and Baltic regions (short-sea)
1.09
1.15
0.68
1.62
0.99
1.43
1.10
8.08
3.97
US Scrap Exports
0
1
2
3
4
5
6
7
India Mexico South Korea Taiwan Turkey Rest of the World
Mil
lio
n M
T
2013 2014 2015
The US is the single largest exporter in the world. Three inter-related scrap regions…Midwest (domestic), East Coast (exports to Turkey) and West Coast (exports to Asia)
Purchasing patterns in Turkey (as a bulk buyer) have a knock-on impact on scrap pricing in both the Midwest and containerised markets such as Taiwan and India
Virgin Iron versus Bulk Scrap
1
1.5
2
2.5
3
3.5
4
170
220
270
320
370
420
470
520
570
US
$/t
on
ne
Scrap HMS #1&2 80:20 Ratio (RHS)
Despite recent price falls, scrap is more than three times the cost of iron ore per unit of Fe
While Turkey’s EAF steelmakers cannot directly switch between scrap and iron ore, it may sometimes be more cost effective for them to re-roll semi-finished steel (billet) into rebar than melt scrap (i.e. the displacement effect)
NASDAQ OMX Scrap Futures
Launched November 2015 alongside LME’s Steel Rebar contract (settled basis Platts)
Cash-settled futures contract with a 12-month forward curve and a lot size of 10 tonnes
~40,000 tonnes (4,000 lots) traded since launch
“Based on the development so far, Stemcor feel these launches have been the most successful in the commodities space since iron ore swaps.”
Phillip Price, Head of Market Risk Management and Derivatives Trading at Stemcor
First voice-brokered trade executed in May by INTL FCStone Ltd on behalf of Stemcor – indicating contracts are being accepted as risk management tools for the steel industry
Ferrous Scrap Futures
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16
Cu
mu
lati
ve L
ots
Cle
are
d
LME Forward Curve
100
150
200
250
300
350
May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17
US
$/t
on
ne
Turkish Imports HMS 1&2 80:20, CFR Turkish Port
US Domestic Shredded, Delivered Mill
Indian Imports, Shredded, CFR Port
Taiwan imports HMS 1&2 80:20, CFR Port
Forward Curve
NASDAQ Scrap Futures
Expected to be launched in late Q3 2016.
Cash-settled futures contract with a 12-month forward curve and a lot size of 20 gross tons To be settled basis TSI 10-day shredded index.
Reference Product:
Shredded obsolete scrap ISRI codes 210–212 inclusive. Homogenous iron and steel scrap, magnetically separated. Originating from automobiles, unprepared No. 1 and No. 2 steel, miscellaneous baling and sheet scrap. Average density 60 (50–70) pounds per cubic foot.
Pricing Point: Delivered US Midwest Mill (Ohio, Illinois, Indiana & bordering vicinities)
Currency: US$
Volume Unit: Long Ton
Agenda
- Introduction
- Index Linking – The Initial Frontier
- Ferrous Derivatives – Iron Ore
- Ferrous Derivatives - Scrap
- Volatility is back
The Return of Spot Price Volatility
Source: TSI
220
260
300
340
380
420
460
500
540
Ja
n 1
3
Ap
r 13
Ju
l 13
Oc
t 13
Ja
n 1
4
Ap
r 14
Ju
l 14
Oc
t 14
Ja
n 1
5
Ap
r 15
Ju
l 15
Oc
t 15
Ja
n 1
6
Ap
r 16
N. Europe S. Europe
€314/t €276/t
€423/t €426/t
European HR Coil Prices (€/tonne)
HRC prices recovered from lows reached at the end of 2015 High price volatility prevails, creating uncertainty for all involved in the steel supply chain
100
58
100 109
86
57
129 145
2013 2014 2015 2016 YTD260
300
340
380
420
460
500
540N. Europe S. Europe
World View
200
300
400
500
600
700
800
Ja
n-1
4
Ap
r-14
Ju
l-14
Oc
t-14
Ja
n-1
5
Ap
r-15
Ju
l-15
Oc
t-15
Ja
n-1
6
Ap
r-16
USA N.Europe Turkey Asean Imports
Regional HR Coil Prices (US$/tonne)
Source: TSI
• European HRC prices followed an uptrend, started at the beginning of the year in Asia
• Despite of the recent reversal of the price direction in China, spot prices in the European steel market remain firm
How Can I Learn More?
http://www.platts.com/events/americas/steel-training-chicago/index
Senior Leadership Team
Vaseem Karbhari London Regional Head, EMEA Office: +44-20-7176-7657 Email: [email protected]
Oscar Tarneberg Shanghai Regional Head, APAC Office: +86-139-1788-4804 Email: [email protected]
Steven Randall London Global Metals Sector Head, Platts & TSI Office: +44-20-7176-7649 Email: [email protected]
Tim Hard Singapore TSI Managing Director Office: +65-6530-6413 Email: [email protected]
Kurt Fowler Pittsburgh Regional Head, Americas Office: +1-412-431-0584 Email: [email protected]
