steel presentation july 2010
DESCRIPTION
General introduction to the LME steel contractsTRANSCRIPT
Managing price volatility in the steel industry
– A Producer perspective
Robert SheldonNew Products Manager
What is risk?
• Supply/demand imbalances• Lack of information on prices and inventories• Uncertainty, Volatility = RISK
• What does it mean for you?– Lost orders; customers walking away from deals?– Reduced margins?– Missed targets?
How do you deal with this?
-
200
400
600
800
1,000
1,200
1,400
Feb
-08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Apr
-09
Jun-
09
Aug
-09
Oct
-09
Dec
-09
Feb
-10
Apr
-10
Trading Date
$ p
er t
on
ne
Cash
3 Month
15 Month
LME Mediterranean Steel Price
Risk management / Hedging
• What is it?
• How does it work?
Two distinct markets
Futures Market (forward market)Material at the steel billet stage (wholesale)Market Participants: LME Members
Financial institutionson behalf of: Industry
Investors
Physical MarketMaterial at any stage of productionMarket Participants: Producers
Re-rollersMerchants / TradersStockistsConstruction companies
Hedge Example
• Scenario:– Company fixes a standard sales price for billet (del. Sep.’10) at a
level that reflects acceptable profit margin on goods sold– Company wants to lock in budgeted price for billet sale now for
Sep. 2010 based on scrap purchased now• Risk of not hedging: Company misses budget and margins suffer• Market Structure: Cash = 500/t, Sep. ‘10 futures = 500/t• Strategy:
– Step 1: Sell Sep. Billet futures now when buy scrap– Step 2: Liquidate (buy back) Sep. when physical billet sold/priced
in
Scenario 1 LME Billet
falls: $400/mt
Scenario 2 LME Billet
rises: $600/mt
Sep.‘10 Billet Sell (2) 400 600
LME Billet Sep. Sell (1)
500
500
Sep. LME Billet Buy (2) 400 600 Futures P/L +100 -100
Net Sell Price 500 500
Producer “Price Fixing Sell” Hedge
Benefits of LME steel futures
• Access to a transparent reference price• Protection against price movements• Ability to offer long-term fixed sales prices and lock in a
margin• Swap physical material between locations on an LME
brand basis
• Ability to meet budgets.• Protect inventory from falling prices.
Producer ConstructionScrap Re-roller Trader Stockist
Benefits of LME Steel Futures
• Collateralise inventory, lower financing.• “Pre-paid forward”- financing.• Sell excess product in periods of over supply.• A source of product in periods of under supply. • Physical product can be delivered against
futures.• Hedge physical purchases in times of strong
demand. • Index bonds and trade finance lines to the LME
price.
LME Steel Billet – Progress so far
Launch to date
Far East Mediterranean TOTAL
Lots 3,249 98,396 101,645
Tonnes 211,185 6,395,740 6,606,925
Turnover to June 1st
($millions) 126.75 2,539.44 2,666.19
Monthly Volume and Market Open Interest
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Feb
-08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Apr
-09
Jun-
09
Aug
-09
Oct
-09
Dec
-09
Feb
-10
Apr
-10
Vo
lum
e (
lots
)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
MO
I
Mediterranean Steel Billet
Max monthly MOI
Launch to 01-Jun-10
Volume and Monthly Open Interest (MOI)
Steel producers with listed brands
• 35 companies, 14 countries (7 Turkish)
• 42 mills (8 Turkish)
• 155 different brands/grades of product approved for LME delivery
LME Mediterranean Billet: Price & Stock
Source: Thomson Reuters Datastream
LME Mediterranean Billet Price (Cash) and Warehouse Stock
2008 2009 20100
200
400
600
800
1000
1200
1400
0
10
20
30
40
50
60
70
80x 1,000
LME Cash Price (U$/MT) Warehouse stock (Thousand tonnes)
Cash Price Closing Stock
0
200
400
600
800
1000
1200
1400
1600
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
Apr
-10
LME Med Billet (3M)
Scrap: CIS Black Sea Export(Steel Orbis)
Rebar: 8-12 mm TurkeyExport FOB (Steel Orbis)
Last 2 years – LME vs
Price Delta
Scrap 93% 79%
Rebar 98% 86%
Good correlation - LME billet price, Turkish export scrap & rebar prices
Real life examples
• Colakoglu Metalurji, Turkish producer
• A.N. Other, Turkish producer
Colakoglu Metalurji, Turkish producer (3 million mt/year)
• Needed to purchase physical billet for Colakoglu’s downstream operations due to a production shortfall
• Bought 3,250mt of physical product in the form of LME warrants
• Took delivery from LME approved warehouse in Tekirdag
• Price was also attractive at the time
A.N. Other - Turkish producer
• Wanted to buy scrap ($700/mt in 2008) but did not want to commit to only buy scrap in case billet prices fell and they were exposed to the market
• Couldn’t sell billet at the price they needed to ($1200/mt) and customer could always renege on the contract if market dropped
• Bought physical scrap in the nearby month (July) and sold LME billet futures for 3 consecutive months forward (August, September, October).
• Prices then collapsed as construction projects were hit not only by high rebar prices but lack of available credit
• Producer was not affected by these dramatic events because of their LME hedge
• Managed to sell billet in the physical market but were protected because of their financial hedge
How do you go about it?
• Talk to an LME Member Bank/Brokerage• Discuss strategy in conjunction with an
LME Member, putting in place necessary resources and internal procedures
• Set up a standard Futures and Options Agreement
• Make an initial trade to develop experience• Begin to ramp up hedge program
THANK YOU
Robert Sheldon