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 director of metals research, said at
AMMs 6th Annual Steel Scrap Conference in
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
The transparent contracts also
are serving as a bellwether to signal where market players feel
prices are heading, and this information is available to the
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.
Asias 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 addition, 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 from well above six times that level within just a
few months in 2008.
buying price for No. 1 busheling in the Chicago market, for
example, plunged to $125 per ton in early November 2008 from
Julys peak for the year at $890 per ton.
At that time, recyclers
couldnt sell their scrap at any price as mills had no
orders for finished steel. "If you cant 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. founder and president Jeremy Flack said. He
predicted that the contract will grow quickly and outperform a
similar CME contract on finished steel in short order.