isri sept 2013 presentation

Key International Ferrous Scrap Markets

ISRI Chicago Commodities Roundtable Forum 2013

17th September 2013 Jarek Mlodziejewski

Senior Analyst

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Disclaimer

Agenda

• Introduction to TSI and our Methodology

• Scrap Update – Key International markets o Turkey o India oAsia

• Scrap – - ‘New’ Opportunities in an old game

Coverage

Steel Hot rolled coil* Cold rolled coil HDG coil Plate Rebar Stainless

Regions covered

USA* Asia Northern Europe* Southern Europe* Turkey India (coming soon)

Iron Ore 62% Fe Fines* 58% Fe Fines* 63/63.5% Fe Fines* 62% Fe (2% Al) Fines*

Scrap HMS 1&2 (80:20)* Shredded A3 P&S

Regions covered

Chinese imports*

Regions covered

Turkish imports* USA Indian imports Taiwanese imports

• Daily Indices Basis for cleared derivatives contracts

Coking Coal Premium Hard

Coking Coal Hard Coking Coal

Regions covered

Australia

TSI methodology

Specialist price information service

Impartial, mechanistic operation compiling spot prices for wide range of ferrous products

Systematic, data-driven index methodology applied consistently world-wide

Offices in Pittsburgh, Shanghai, London and Singapore

Scrap indices published for US Midwest shred, Turkish HMS 80:20, Taiwanese and Indian shredded imports

Agenda




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CFR Turkey HMS #1&2 80:20 US$/tonne

Oversupply, weak steel markets, purchasing activities

act to depress import prices in 2013

Presenter

Presentation Notes

Tough 2013, downward trend Market in oversupply up to June, too much scrap put pressure on the price, though it fell faster and harder than the US midwest market during the same period. Post June recovery, with a period of consistant buying from in the all the key markets, bringing some bullish behaviour up till August. As typical for Turkey however, the mills disappeared, leading to some weakness, which we can see now, moving in tandem with the US. May now be more economic to buy billet, as was the case around the middle of the year, this could once again lead Turkey to ignore the ferrous scrap market, with only a handful of scrap cargoes having gone through recently after a period of inactivity. Interestingly, with strengthening steel demand, Turkish mills have recently upped the buy price of local scrap. Weak import levels, down about 20% on an annualised basis, procurement of local scrap, however, was up 13.1%. India has offered more billet to the Middle East as the rupee has continued its slump, while Turkey's local currency has depreciated along with a host of developing markets on talk of an end to US quantitative easing. But Syria is the issue on most traders minds.��

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CFR Turkey HMS #1&2 80:20 US$/tonne US Midwest shredded US$/tonne

Source: TSI and Platts

CFR Turkey tracks closely with US Midwest Prices. (Potential proxy for US Shred)

Correlates very well with regional “scrap pools” such as

the USA…

R2 Correlation 85%

Presenter

Presentation Notes

Markets move together, though lately it seems to be a question of Turkish mills waiting to see what will happen in the US before coming to the market. Recently there has been some weakness in western industries with steel production down on an annualised basis in Europe, the US and Turkey, whilst scrap flows haven’t seen any weakness to date, especially with the opening of more shredders in the US, seeing supply put some downard pressure on price.

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US South East scrap conversion cost Turkey scrap conversion cost

Rebar imports? Bad?

The balance of payments is firmly in the favour of the US, to the tune of $2 billion in 2012

Presenter

Presentation Notes

Fact of the matter is that Turkey is able to more efficiently convert scrap to rebar, to the benefit of the American construction industry, with the balance of payment issued eased by Turkey importing millions of tonnes of US scrap. Taking into account the cost of importing rebar, and the revenue from exporting scrap, the US is 2 billion dollars in the green.

Agenda




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CFR India containerised shredded Sample of normalised data submissions

Using CFR India as an example of the data submission process

Presenter

Presentation Notes

India has offered more billet to the Middle East as the rupee has continued its slump, while Turkey's local currency has depreciated along with a host of developing markets on talk of an end to US quantitative easing. But Syria is the issue on most traders minds. Sluggish demand continued to pressure the market, but this year’s abundant monsoon rains led to talk of a revival in rural demand. �

Agenda




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CFR North Asia HMS 1 US$/tonne CFR Taiwan containerised HMS 1&2 80:20 US$/tonne

Presenter

Presentation Notes

In Q1 of 2013, Taiwanese Steel Mills were initially very positive as they feel that things would turn for the better, after the lows seen in Q4 2012 (around the same time that iron ore prices plummeted to $80/t) however we soon see here this was not to last. Weak domestic demand was exacerbated by the high cost of scrap, leading to buyers to look for other sources. Scrap and alternative metallics such as pig iron was purchased from Japan, leading to reduced volumes from the US As we move into Q3 of 2013, we find that domestic rebar demand is still very weak in Taiwan. We have also started seeing reports coming out of Taiwan of mills selling rebar at a loss, and any attempts to increase prices are constantly rebuffed by buyers. Currently, Taiwan has no major infrastructure projects in the pipeline and rumour states that the Taiwan government will be opening up their steel market for China. Should this be true, there may be some tough times aheads for Taiwanese mills. Recently market participants believe that the supply/demand situation in Taiwan has achieved a sense of balance, and most are happy with the current price levels. On a more regional level, when looking at China, Taiwan, Korea and Japan, scrap price are seen to be largely stable, in line with iron ore, given that its been recently range bounds. Furthermore, there hasn’t been much activity in Japan in terms of price movement for its export scrap, so many believe that current levels could be here to stay for a while to come.

Agenda




Presenter

Presentation Notes

Pain in googling

Price Risk / Missed Opportunities. • More than a century old.

• A great, great granddad that has never been bigger or fitter.

• He’s also learnt new tricks: exporting around the entire globe on an increasing scale since 2000.

• The original ‘green’ industry. • One of the few industries

contributing positively to US balance of trade. US$28bn in 2012 (ISRI).

• The master of re-invention…and yet: slow to embrace new tools, so far.

Total Ferrous Scrap Contract Trading TSI (HMS 80:20, Turkey) & AMM (Bush, US)

0100200300400500600700800900

1000

AMM Bush USA TSI HMS Turkey

Lots

trad

ed

The TSI contract is useful for coastal scrap sellers and buyers from Houston to Maine.

The AMM contract is useful for companies involved in Bushelling in the Midwest.

Companies can lock firm prices for 14 months ahead – not sell ‘To be determined’…

Total Ferrous Contract Trading TSI (HMS 80:20, Turkey) & AMM (Bush, US)

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AMM Bush USA TSI HMS Turkey Iron Ore

Lots

trad

ed

…But, neither has so far ‘taken off’ – despite ‘big months’ on each contract. In contrast, iron ore saw a steady rise, pull back, then full take off.

NB – iron ore graphs are for the corresponding ‘first months’ of the contract’s life (i.e. April ‘’09 onwards NOT Aug’12/13). Iron ore is currently trading over US$2bn per calendar month (2,500 contracts per day)!

Lots traded

Presenter

Presentation Notes

TALK THROUGH THE FOLLOWING, after going through the slide above. So, the million dollar question is: Are the world’s leading miners, traders and steel mills ‘mad’, or ‘gambling’?��OR, could there be value in corporate use of derivatives to manage price risk? The iron ore contract is a financially settled contract (just as the scrap contracts are). The majority of companies trading iron ore are directly involved in the physical trade. The same is true of the Turkish scrap contract’s current trading group. The price of iron ore is hugely volatile – akin to copper. Scrap metal price volatility is well known. So – how does would trades have played out?

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Cargo Value vs Jan '13 (RHS) CFR Turkey HMS #1&2 80:20 US$/tonne

Price Risk / Missed Opportunities. Value of a deep-sea cargo has fluctuated wildly since

the beginning of the year. RHS shows changes of +US$0.5m and –US$2.5m.

US$ M

illion

For sellers, the ‘best of 2013’ was over almost immediately after January closed out. It may yet come back, but that’s for Q4.

Price Risk / Missed Opportunities. (Example for processor/exporters).

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CFR Turkey HMS #1&2 80:20 US$/tonne Forward Curve at Jan 4th 2013

US$

/t

A forward contract entered into in January would have allowed an exporter moving 35,000t per month offshore to realise the red line, rather than the blue line.

Jan Feb Mar Apr May Jun Jul Aug Sept Cargo Value Differential if hedged 245k 420k 70k 0k 840k 1.3m 490k 70k 245k

Presenter

Presentation Notes

Now its nice to have hindsight, and the ability to look back at the market and state that someone “should” have done this. This isn’t what I’m trying to show. The point of this is to show that regardless of what happened, should the market have gone up or down over 2013, is that by hedging, a processor could have locked in a price level for a certain number of tonne, and minimised the potential loss or gain when comparing to a high price point, such as here when we compare it with the high price levels seen in January.

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CFR Turkey HMS #1&2 80:20 US$/tonne Forward Curve at June 4th 2013

US$

/t

A forward bought in June would have allowed a mill buying 35,000t per month to realise the red line, rather than the blue line. Scrap would have cost this much less:

Jun Jul Aug Sept Cargo Value Differential if hedged -230k -560k -805k -630k

Price Risk / Missed Opportunities. (Example for mill/buyers).

Unfounded fears:

• Speculators (if you want to hedge, you need a speculator to ‘take’ your risk).

• ‘Losing’ Money versus locking prices.

• New Tools: the orange juice, milk and wheat industries use futures religiously.

• Inaction (see what happens) is not a ‘decision’.

Not hedging is gambling. Prices TBD?

Price Risk / Missed Opportunities.

Further information:

Jarek Mlodziejewski London

[email protected] +44 207 176 7618