11/13/2012 — PHILADELPHIA – The first U.S. Ferrous scrap futures contract, launched by CME Group Inc. in September is gaining traction as participants test the waters with modest trades.
More than 3,000 tons were traded in October, a positive sign for the new hedging tool. "This is actually very good considering this is a very new market. We see this as a very positive sign for growth," Youngjin Chang, CME Groups’s director of metals research, said at AMM’s 6th Annual Steel Scrap Conference in Philadelphia.
Participants are hedging small busheling tonnages of 20 to 100 tons to try the contract out. Chang recommended that attendees give the contract a try with a nominal trade.
The transparent contracts also are serving as a bell wether to signal where market players feel prices are heading, and this information is available to the general public.
The global economy shifted the dynamics of business, creating a need for such a contract to help mitigate exposure to wild fluctuations prevalent in the scrap and steel industries. "Volatility is here to stay and globalization is inevitable," Chang said.
Asia’s growth is a primary driver for the need for such contracts. Chang pointed out that 60 percent of iron ore exported to China is now done on a spot basis, and fixed contracts for raw materials are being replaced with shorter terms. In additions, ferrous volumes in Asia are growing and will continue to grow.
Hedging will help any business that needs to reduce its exposure to adverse and unpredictable price movements, he said.
Joe Reinmann, chief executive officer of St. Louis – based Kataman Metals LLC, reminded the audience that busheling prices plummeted to nearly $100 per gross ton well above six times that level within just a few months in 2008.
AMM’s consumer buying price for No. 1 busheling in the Chicago market, for example, plunged to $125 per ton in early November 2008 from July’s peak for the year at $890 per ton.
At that time, recyclers couldn’t sell their scrap at any price as mills had no orders for finished steel. "If you can’t sell your material to the mill, you can go and sell forward to protect the value of the inventory," Reinmann said.
The top executive at a Cleveland-based flat-rolled distributor said his company had embraced the concept, but he recognized that there are a lot of misconceptions about the contract. Tentative participants are afraid that if futures prices fall it will cost them money, and have voiced concerns that interlopers will speculate on the contract and disrupt the market.
"We are the last industry in the world that is adopting these contracts. Actually, you are going to take the volatility and risk in your company down," Flack Steel Ltd. chief executive officer Jeremy Flack said. He predicted that the contract will grow quickly and outperform a similar CME contract on finished steel in short order.