Midwest USA shredded steel scrap futures to launch on Nasdaq

WSEM - World Steel Exchange Marketing

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To: Steel scrap processors, steelmakers, steel service centers, traders and end users

From: Peter F. Marcus, CEO, World Steel Exchange Marketing (WSEM)

Date: March 7, 2016Topic: Midwest USA shredded steel scrap futures to launch on Nasdaq (Stockholm)

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March 29, 2016 is an important date!

US Shredded Steel Scrap TSI Index futures trading will begin on the Nasdaq Commodities Exchange (Stockholm).Trading hours are 2:00 a.m. to1:00 p.m. EST. The 20-gross-ton USA Midwest shredded steel contract will be listed, and quoted, for the current month and each of the next 11 months. The contract will finally settle on the 11^th day of each month against the Midwest US Shredded Steel Scrap TSI Index price.

Other Nasdaq ferrous futures products soon to be trading include: a) Midwest US Hot-Rolled Coil; b) 62% Fe Iron Ore CFR China; c) Australian exported Coking Coal; and d) ASEAN Hot-Rolled Coil.  

The listing of these ferrous futures products will bring a myriad of price hedging opportunities to a variety of industry groups. Liquid ferrous futures markets will:

• Create the ability to enter, exit and shift positions at low cost.
• Permit the protection of scrap processing margins through hedging.
• Allow steel mills and foundries to lock in feedstock cost.
• Offer forward price information to demolition contractors; thereby, permitting them to bid on jobs with less risk.
• Provide a financial tool for building contractors to stabilize the cost of rebar over the life of the project.
• Give access to traders outside the steel industry, whose activity adds to liquidity and narrows bid/ask spreads.
• Provide a financial tool to hedge inventory values. By selling futures against the inventory, the scrap processor, steel mill, service center and end user can protect themselves against unexpected changes in prices. Once hedged, the inventory holder can borrow money at better rates from the banks against that inventory.
• Offer a financial instrument whereby anyone who thinks that the futures price is too high, or too low, can profit from their opinion.
• Position a company to better survive severe price swings. Leading international companies, including Hess, Cargill, BHP, Alcoa, Mars and Tyson Farms, have been successfully managing their commodity price risk exposure for years.

Huge upside for futures volume

U.S. shredded steel scrap futures will provide an excellent hedging tool for U.S.A.-based and international steel scrap processors, scrap exporters, EAF mills, foundries, integrated steel mills and speculators/investors . The U.S.A. shredded steel scrap price is also an international price; it has a direct impact on the prices of most long products made outside of China. 44% of steelmaking outside of China is accomplished via the EAF route.

U.S. shredded steel futures should become the “anchorproduct” in the ferrous futures complex, i.e. its success and growing liquidity should encourage and support futures trading across the entire steelmakers’ metallics spectrum. For shredded steel scrap specifically, the futures contract:

• Represents an ubiquitous product whose quality has improved and become more uniform in the past decade due to better recovery methods employed by shredders. Shredded steel scrap may become the most highly traded steel futures product.
• Will settle monthly against the Midwest US 10-Day TSI Shredded Steel Scrap Index (that’s based upon a robust price generation system for this product). The TSI prices are already used to settle ferrous futures contracts in the US, Europe and Singapore.
• Allows a steel scrap processor or mill scrap buyer to take a view on the market direction without impacting its physical flows. Once there’s a liquid futures curve, a particular futures position can be closed-out or reversed in seconds; and, at low cost.
• Reduces a processor’s risk when it gets get short in its physical sales–i.e., booked more business than the amount of steel scrap it has on hand and/or has committed to buy. It is normal practice for scrap processors to book most of their mill deliveries by the 10^th of the month; even though they have yet to purchase 100% of the needed feedstock.

Rapid acceptance

WSEM expects a rapid ramp-up of steel scrap futures trading activity on the Nasdaq for a variety of reasons including:

• The extraordinary volume of futures trading in the other industrial metals.
• The enormous success of ferrous trading volumes in China on the Shanghai Futures Exchange and the Dalian Commodities Exchange.
• The surge of iron ore futures on the Singapore Exchange.
• The widespread need to hedge the steel scrap price risk.

Once the US shredded futures become broadly accepted, Nasdaq shredded futures volumes should be significant given the size of the physical market and the contract’s broad-based applications.

World Steel Dynamics estimates that the size of the non-Chinese steel scrap and finished steel product market tied to steel scrap prices is roughly 460 million tonnes as follows: a) 60-70 million tonnes generated per year in the USA; b) about 90 million tonnes of steel scrap that’s 3traded globally; and c)300 million tonnes for long and flat steel products whose price is strongly influenced by changes in the price of steel scrap. The 460 million tonne market does not include: a) potential transactions for middle-man companies and others along the supply chain; b) those engaged in hedges based on the spreads in price between steel scrap and related products; and c) those seeking to hedge their common stock holdings in steel and raw materials companies with a position in shredded scrap futures.

Given that copper futures on the LME trade at about a 50X multiple of consumption, it seems to be conservative to project a 10X multiple for US Shredded Steel Scrap Futures within three to five years. At a 10X multiple of 460 million tonnes and 20 tonnes per contract, this amounts to 230 million futures contracts. If US shredded futures enjoy the kind of financial trading support we see on the LME for non-ferrous metals, and the contract is adopted by other traders in the steel supply chain, trading in the Nasdaq US shredded futures volume turnover should exceed this 10X multiple.

On an aggregated dollar basis, the ferrous commodity complex–i.e. steel products and steelmakers’ raw materials –is second in size only to the petroleum complex; yet, until recent years, there had been no trading in the sector.

Commodity futures have been around since the 19thCenturyand have proven themselves to be indispensable for many industries. The Chicago Board of Trade was founded by a group of grain merchants and banks in 1848;and the London Metal Exchange began trading copper forwards in 1877.      

WSEM believes that the germination period for ferrous futures seeds that began in 2008 –with the launching of LME billet, CME Hot-Rolled Coil and SGX iron ore futures –has been largely completed; and, we are now in the sprouting stage.

What does WSEM bringing to the table?

WSEM has an agreement with Nasdaq Commodities to promote and support the growth of the US Shredded Steel Futures. On the first day of trading–i.e., March 29^th – we are seeking to have in place the following:

• Three market makers providing bid/ask spreads in the first three trading months and at least one of them making markets for each month along the 12-month curve.
• Five to 10 steel scrap processors ready to post bids and offers; in effect, ready to trade.
• Strong marketing support from the WSEM and WSD teams, which includes Peter Marcus(WSD’s managing partner); John Conheeney(President of WSEM whose been involved in futures trading for 30 years); Mike Marley(expert steel scrap commentator); Bob Mateer (flat-rolled steel prices consultant) and Dave Wonkovich(veteran steel scrap broker/trader)
• An active Twitter feed that will provide relevant market prices and news updates.
• Trading Technologies (TT) quote screens available for order input and/or for view-only purposes.
• Access to the WSEM and WSD staff to assist in accessing available information and to better track the market’s crosscurrents.
• Mike Marley’s “Shredded Power” weekly insightful commentary. Please call your Commodity Futures Broker or contact John Conheeney 201-503-0922 jconheeney@wsemgroup.com to take the steps to begin trading the Midwest US Steel Scrap TSI Index futures.
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Best regards,

Peter F. Marcus

This report includes “forward-looking” statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, international currency movements, technological developments, governmental actions and/or other factors. The information contained in this report is based upon or derived from sources that are believed to be reliable; however, no representation is made that such information is accurate or complete in all material respects, and reliance upon such information as the basis for taking any action is neither authorized nor warranted. Neither WSD nor WSEM solicit, and avoids receiving, non-public material information from its clients and contacts in the course of its business. The information that we publish in our reports and communicate to our clients is not based on material non-public information. The officers, directors, employees or stockholders of World Steel Dynamics Inc. or World Steel Exchange Marketing do not directly or indirectly hold securities of, or that are related to, one or more of the companies that are referred to herein. World Steel Dynamics Inc. may act as a consultant to one or more of the companies mentioned in this report.