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June 26, 2017

Nasdaq Futures Exchange (NFX) to commence trading of USA Midwest shredded steel scrap futures

The Nasdaq Futures Exchange (NFX) will begin trading Midwest U.S. shredded steel scrap index futures on September 15, 2017.
Nasdaq Futures Exchange (NFX) to commence trading of USA Midwest shredded steel scrap futures

Background

When Ken Iverson turned on Nucor’s first Electric Arc Furnace in Darlington, S.C. in 1969, he started a revolution in USA steelmaking. Another revolution begins this September 15th when the NFX starts trading the Midwest U.S. shredded steel scrap index futures contract. This contract will become an indispensable tool for steel scrap processors, steel mills, long product consumers, hot-rolled band buyers in the USA, and others needing to mitigate the impact of steel scrap’s price volatility. The rise of ferrous futures trading in the U.S. is a critical development in the evolution of the USA and global steel industry. U.S. shredded steel scrap futures will allow steel industry professionals, on a low cost and flexible basis, to:

  • Leverage their real world market knowledge of current prices and price trends to exploit what they view as “mispricing” in the futures market.
  • Provide fixed prices for each month out to 15 months for customers; and, thereby, create the opportunity for more business.
  • Hedge inventory values against price declines. Also, obtain lower-cost inventory loans from banks when the inventory is hedged.
  • Protect over-sold positions in the physical market.
  • Go “long” the market without increasing inventory or tying up more than margin capital.
  • Establish a short position.
  • Exit or reverse a position with a call to your broker; or, the click of a mouse.
  • Enjoy greater trading leverage – i.e., assuming the margin requirement is in line with similar futures products.

The U.S. shredded futures contract is a true proxy for the massive global steel scrap market and, as well, for steel products impacted by changes in the steel scrap price. The market includes: 

  • The 50 million tonne annual USA obsolete scrap consumption.
  • 90 million tonnes of global steel scrap trading per annum. 2
  • 250+ million tonnes of non-Chinese steel products whose price is impacted by changes in the price of steel scrap – including an array of long products and hot-rolled band in the United States.

Now's the time to prepare for action

Contact your current Future Commission Merchant (FCM) and tell them you want to trade the NFX shredded futures. For those with no futures account, consider the accompanying list of brokers known to be active in the ferrous futures. (Note: If you are a registered futures broker and want to be added to this list, contact John Conheeney at jconheeney@wsemgroup.com).

World Steel Exchange Marketing (WSEM), founded by Peter Marcus, Managing Partner at World Steel Dynamics (WSD), has been working with Nasdaq for the past three years to develop and promote its trading of ferrous futures products. Once launched, we expect a fast ramp-up in trading activity for a number of reasons, including:

  • In China, trading in ferrous futures has been massive almost from its launch in March of 2009. Today, annual trading of rebar is about 6.5 billion tonnes annualized, iron ore is 25 billion tonnes and coking coal is 2.3 billion tonnes. Outside of China, the Singapore Exchange trades about 1.5 billion tonnes of iron ore annualized. (Note: NFX will follow the shredded futures launch with 62% Fe iron ore CFR China futures.)
  • The London Metal Exchange’s “80:20 Heavy-Melting Scrap CFR Turkey TSI Index” futures traded a million tonnes of equivalent futures in 2016 (its first year) and has already traded over 1 million tonnes year to date. Successful futures markets begin slowly and grow geometrically. The LME scrap appears to be on this track.
  • LME copper and aluminum futures trade at 30X and 40X multiples of physical production annually. A 10X multiple of the steel scrap market consumption, as outlined above, would be about 3.9 billion tonnes or 390 million 10-gross-ton NFX shredded futures contracts.
  • Steel scrap processors, traders and scrap buyers have an inside information edge because they are in the physical market. They will be able to harness their market insights into a successful futures trading strategy. The two largest privately held companies in the U.S. – Koch Industries and Cargill – for decades have integrated commodity futures trading into their vast physical commodity businesses. Similarly, those in the physical steel scrap market will now have the opportunity to capitalize on price differences between the futures and the physical markets – giving them a distinct advantage over financial traders that are not involved in the physical scrap steel market. The importance of this opportunity, and the extent to which it will attract steel processors to the futures trading arena, cannot be overestimated.
  • WSEM people are well known in the steel and steel scrap market. Peter Marcus, Chairman of WSEM and founder of WSD, has 56 years of experience as a steel analyst, consultant and price prognosticator. John Conheeney, President of WSEM, has 30 years’ experience in futures trading with his focus on steel futures for the last 10 years. Mike Frawley, Co-Chairman and CEO of WSEM, has run two major metals futures trading desks in the past and has over 25 years’ experience in metals market futures. Mike Marley has 35 years of experience reporting on the steel scrap market, with unparalleled contacts in the ferrous scrap market. Bob Mateer has 35 years’ experience as the top steel buyer for two of the major automotive companies. He has run an independent galvanizing business and is now a consultant on pricing developments in flat-rolled steels.
  • Hedge funds that are long or short steel stocks, once there’s sufficient liquidity, will hedge their equity positions on the futures exchanges with off-setting positions.
  • Commodity hedge funds manage over $350 billion, and are just beginning to include ferrous products in these portfolios. Steel scrap, hot-rolled band and iron ore futures will command a healthy slice of these investment portfolios; and, in turn, this new investment will add significantly to ferrous futures trading volumes.
  • Hedge funds may prefer investments in companies that incorporate steel/steel scrap futures trading strategies into their normal business activities. In theory, these activities may reduce price volatility and add to profitability.
  • Speculator activity has the potential to become enormous given the vastness of the steel industry and the underlying hedging activity it will generate. Speculator trading volumes usually are a 5X to 10X, or greater, multiple of commercial volumes in commodity futures markets. Greater volume begets more volume. In most welldeveloped futures markets, including China, the large majority of the trading is done by those not in the physical business. 

NFX advantages

At least three market makers will be committed to make two way prices between 9:00 AM and 2:00 PM EST. There will be bids and offers posted 15 months forward.

  • Access to the NFX trading platform will be available via laptop or mobile app.
  • Additional liquidity created by arbitrageurs playing the spreads between the NFX shred and other exchanges ferrous product prices – including the LME’s 80:20 heavymelting steel scrap price CFR Turkey.
  • Nasdaq’s 18 member firms that rank among the largest commodity futures brokerages in the world. The original focus was on energy products when the state of the art platform was built; but, they are committed to seeing the ferrous products succeed.
  • The staffs of World Steel Exchange Marketing and its parent, World Steel Dynamics, are available daily to provide insights and intelligence about marketplace happenings. Conferences and call-in discussions will be part of this strategic information effort. 

Getting ready to trade

In order to trade steel scrap futures on the NFX, you need an account with: a) a Futures Commission Merchant (FCM) that’s a NFX member; or, b) a FCM that has a clearing arrangement with a NFX member firm. Traders with a futures account just need to tell their 4 FCM that they want to start trading NFX US shredded steel scrap futures, and the FCM will do the rest.

Following is a list the key representatives employed by FCMs and the “Off Exchange Brokers” that arrange off-exchange trades between clients of FCMs; and then submit trades to NFX for clearing.

FCMs active in ferrous futures trading

FCM Representative Phone E-Mail ADM

Ira Levine 212-785-2892 ira.levine@admis.com

FC Stone Intl Spencer Johnson 212-379-5492 spencer.johnson@fcstone.com

High Ridge Futures Dan Uslander 646-321-4570 duslander@highridgefutures.com

Macquarie David Coates 312-730-9771 david.coates@macquarie.com

SG Americas Charles Fitel 212-278-5661 charles.fitel@sgcib.com

Off-Exchange Brokers Website Crunch Risk LLC Andre Marshall 713-401-9146 www.crunchrisk.com

Freight Inv. Service Martin Vera 201-979-9159 www.freightinvestorservice.com

GFI Henry Herbert 44-20-7422-1218 www.gfigroup.com

SSY Adam Mammon 631-524-9779 www.ssyonline.com

As noted above, in July 2015, the NFX began trading energy futures with the full support of 18 of the world’s top 25 derivatives clearing firms and their customers. These clearing firms provide global access to the NFX trading platform, which enhances the NFX, shredded steel contract’s chances of success.

Future Commission Merchants (FCMs) clearing on the NFX

ABN AMRO Clearing Chicago LLC

ADM Investor Services Inc.

Advantage Futures LLC

Citigroup Global Markets Inc.

E D & F Man Capital Markets Inc.

Goldman, Sachs & Co.

INTL FC Stone Financial Inc.

J.P. Morgan Securities LLC

Merrill Lynch, Pierce, Fenner & Smith, Inc.

Mizuho Securities USA Inc.

Morgan Stanley & Co. LLC

Phillip Capital Inc.

RBC Capital Markets

Rosenthal Collins Group, LLC

SG Americas Securities, LLC

Straits Financial Group Wedbush Securities Inc.

Wells Fargo Securities LLC.

(Note: FCMs not on this list likely have relationships with NFX members that will provide trading access). 

 

For more information, please call:

John Conheeney, President, WSEM 201-503-0922 / 201-785-4347 (mobile) jconheeney@wsemgroup.com

Mike Frawley, Co-Chairman & CEO, WSEM 917-445-8454 mfrawley@wsemgroup.com

Mike Marley, Vice-President, WSEM 484-751-5600 mmarley@wsemgroup.com

Peter Marcus, Managing Partner, WSD Co-Chairman, WSEM 201-503-0902 pmarcus@worldsteeldynamics.com