Steel and Scrap Swaps Webinar

8/7/2019 Steel and Scrap Swaps Webinar

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Steel, Iron Ore and Scrap Metal

Risk Management Webinar

Thursday 17th Feb 10:00 AM GMT


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Freight Investor Services is dedicated to finding and developing innovativesolutions to the problems faced by our clients on a daily basis.

A Quick Word About FIS

Over 10 years, we have aimed to become the foremost provider of

liquidity and facilitator of risk management products in five specialist

commodity markets.

Today, FIS serves the needs of over 230 clients on a daily basis. We are

the leading derivatives brokerage by market share within each of our core

markets.


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. verview of Scrap Metal

.2 A Common Problem

.3 What is a Swap?

.4 Solving our Problem

.5 Summing Up

.6 + &Next Steps Q A

Agenda


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Worldwide Scrap Metal

Source: World Steel Dynamics


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Scrap Metal in Steel Production


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Worldwide Scrap Metal


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http://www.thesteelindex.com/en/scrapprices/

The Steel Index CFR TurkishScrap


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TSI Correlations

Correlations with TSI CFR Turkish ScrapShredded N Europe Domestic Delivery . %93 00

Shredded N Europe Domestic Delivery Shredded Rotterdam Export . %92 10

Shredded North America Export FOB East Coast . %95 80

Chinese and Subcontinent Dry Bulk Ship Scrapping Prices > . %91 20

Chinese and Subcontinent Dirty and Clean Tanker ShipScrapping Prices

> . %87 97

LME Billet . %91 4

Source: AMM, TSI, World Steel Dynamics, LME


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.1 Overview of Scrap Metal. Common Problem

.3 What is a Swap?


.5 Summing Up


Agenda


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The Scenario

, : - -It is June 2011 A steel mill would like to offer a fixed price off

,take agreement to an important client for 240 000 tons of billet

( , )produced from scrap evenly through 2012 20 000 tons per month

( % )In order to service this agreement assuming a yield loss of 13

. ,the mill has an exposure of approx 276 000 tons of scrap metal over

( , )the course of the year 23 000 tons per month


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The Problem

-By signing an off take agreement and guaranteeingsales volumes the mill significantly reduces its

.operational risk

,However since it has fixed its revenues but must

continue to purchase scrap on the volatile spot market

it s margins and cash flow are now exposed to

& .considerable financial uncertainty risk


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Two Possible Solutions

( )1 Periodically stockpile physical scrap during favourable markets to hedge

exposure on the approach and over course of 2012

)a Storage limitations and cost of carry

)b Limited trade finance

)c No guarantee of a favourable market in 6 months

)d

( )2 Use scrap swaps to hedge the price exposure up to 24 months in advance and

enter the spot market at its own convenience to purchase the scrap

( )3

, ,n reality depending on market conditions a complementary( ) ( )ombination of both 1 and 2 usually presents the best course of.ction


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.1

Overview of Scrap Metal

.2 A Common Problem

. hat is a Swap?.4 Solving our Problem

.5 Summing Up


Agenda


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What is a swap?

A wap is a contractualagreement

brokered between wo counterparties to ettle the difference in cash between

a rice agreed today fora particular commodity (e.g. Ferrous Scrap Metal)

fora specified period in the future (e.g. Calendar Year 2012)

and the ctual priceof the commodity during that period

( . . )as determined by an index e g the TSI CFR Turkish Scrap Index


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What is a Swap?

or Example.1 ( It is June 2011 and the spot price of scrap according to The TSI CFR Turkish

) .Scrap Index is $444 per metric ton

.2 .I think the price of scrap is going up and will average higher than $460 in 2012

.3 My counterparty disagrees and thinks the price will be lower than $460 .in 2012

.4 Since we are both confident in our views we agree that we will review the actual

.index average again at the end of 2012

.5 We gree a wap contract for 2012 with strike price of $460 So, for every US$ that the average index price for 2012 is higher than $460 my counterparty pays me $1.

Conversely, for every $1 it is less than $460 I pay my counterparty $1.

.6 On Jan 1st2013 we average the weekly values for 2012 and find that the actualaverage for the year was $450.

7. I pay $450 - $460 = $10 to my counterparty .


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What is a Swap?

n Reality , , , ,Counterparties are scrap traders steel mills service centres end users

.investment banks and hedge funds of various sizes

Individual trades are usually for multiples of 5,000 tons per month ( 5,000 tons >> $1

change in price = $5,000 exchanged)

/ (Trades are anonymously matched facilitated through brokers like FIS) A clearing house and its members stand between the financial transactions of the

.two counterparties and act as insurance against counterparty default

. .I e even if one counterparty goes bankrupt the second may still confidently retrieve its

.earnings from its clearing member or the clearing house


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The Mechanics of Swaps Trading

Swap Buyer( )Front Office

Swap Buyer( )Back Office

Swap Seller( )Back Office

Swap Seller( )Front Office

Clearing Member( )Back Office

Broker( )FIS

Clearing Member( )Back Office

Clearing House( . )LCH Clearnet

1 1

2

3 3

4 4

E

X

E

C

U

T

I

O

N

C

L

E

A

R

I

N

G


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osition with the [ / ]pposite profit loss to your natural position in the physical market result

( ) ( )ion can be held to maturity for cash settlement or flexibly reversed closed out by taking secon

The size of the position and overall effect on your net market e

,So whether steel prices increase or decrease [ / ] [ /he net cost revenue you pay rec

Combining Natural Exposure withSwaps


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.1

Overview of Scrap Metal

.2 A Common Problem

.3 What is a Swap?

. olving our Problem.5 Summing Up


Agenda


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,Our Mill has a spot exposure of roughly 276 000 tons of scrap metal - .over the course of 2012 from it s off take agreement

They are

)1 , Worried that scrap metal prices might increase eliminating the margin.between their volatile costs and the fixed revenue from the billet

)2 At risk of losing money on their transaction or being forced to default on.their important client if the market turns significantly against them

)3 /Unable to effectively allocate invest working capital since they cannot

.accurately forecast profit margins and must keep a large cash reserve

Confused !? No Problem all us on + 4 20 7090 1126 or mail usat .teel@feightinvestor com and we llwalk you through it

The Problem


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he Mill decides to use swaps to offset its exposure ,The Mill contacts FIS and places a buy order for 13 800 lots of LCH cleared swaps for the

Cal 12 period (20mt per lot x 13,800 lots = 276,000 mt).

A broker at FIS negotiates a firm strike price with a seller in the market at $376 per

.metric ton for settlement against TSI s CFR Turkish Scrap Index

.The trade is agreed and confirmed and FIS and the Mill report the trade to LCH

The Mill has successfully hedged its net cost for the exposed volume of exposed scrap at

.$376 per metric ton regardless of the actual price of the spot market in Q4

The Solution



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hysical Position , 23 000 tons x $440 x 12 months= - , ,$121 440 000

wap Position ( - ) , =$440 $376 x 23 000 x 12, ,$17 664 000

et Cost - , , + , , = -$121 440 000 $6 624 000, ,$103 776 000

- , , / , = -$103 776 000 276 000 $376per metric ton

The Result


t the end of 2013 the settlement price on TSI Turkish Scrap isalculated at $440 per metric ton

&

Pr

ofi

t

Loss

$440

$376

+$64

Swap&P L

/Average $ MTTSI Turk Scrap

The profit from the Mill s swaps position is equal and

.opposite to the increase in the physical cost

,As such the net cost of scrap metal for the period of

.Cal 12 is fixed at the strike price of the swap

The Mill has found a way to fix the net price per ton

of scrap metal

18 months in advance

Without having to periodically enter the

scrap market for large volumes of

scrap


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The Result

The Mill fixed its overall margin well in advance.

Regardless of spot price, the Mill was able to enter the spot market at its convenience and on a regular basis for small

tonnages reducing its overall costs of carry.

Where each of its competitors was forced to default on their long-term off-take agreements or sink significant quantities

of cash maintaining the unprofitable agreement, this mill was comfortably able to honour its commitment to its

customer.

The customer is delighted with the service provided by the Mill and decides to double its off-take order for 2013.

Since the Mill had secured the profit it would receive in advance, it has been able to confidently allocate capital for a

second site to accommodate its new requirements.

fixed margin


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Advantages Summary

Secondary Advantages

Creates a secondary pool of liquidity

to physical market

Anonymous trading

Low risk of default

Forward curve gives price discovery to

market expectations

Flexible, quick adjustment of exposure

Physical operations left in tact

Expertise already within company

Primary Advantages

Secure Margins

Reduce financial risk

Better Forecasting

More efficient capital allocation

Better Service

Reduce Need for Stockpiling

Lower Storage Costs

Competitive Advantage


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.1 Overview of Scrap Metal

.2 A Common Problem

.3 What is a Swap?


. vailable Products.6 + &Next Steps Q A

Agenda


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Turkey Scrap / The Steel Index /LCH.Clearnetproduct index clearing house

clearing house LCH.Clearnet

lot size 20 metric tons

price quotation USD / metric ton

trading months Up to 24 Months Ahead ( Mths, Qrtrs & Yrs )

settlement Cash settled

product Turkey Heavy Metal Scrap

index The Steel Index

grade Heavy metal scrap 1 & 2 blended in an 80:20 mix

delivery Within 30 days

payment Cash / LOC

price point CFR Turkish Port

swap specifications

index specifications

n te re ste d i n t hi s s wa p? R equ ir e m or e i nf or ma ti on ? Get our free reports at :/ / . / -ttp bit ly steelreportsor call us on + 4 20 7090 1126


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S Europe HRC / The Steel Index /LCH.Clearnetproduct index clearing house


lot size 20 Metric Tons

price quotation EUR / metric ton



product South Europe Hot Rolled Coil


grade Prime mild carbon steel EN10111 DD11 (or equivalent)

gauge / width 2.0 4.0 mm / 1250 1600 mm

coil weight 14 25 metric tonnes

material surcharges (e.g. scrap surcharge) Included

extras (e.g. non-standard dimensions) Excludedprice point Net effective base price, ex-mill / S Eur Base Point

swap specifications




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N Europe HRC / The Steel Index /LCH.Clearnetproduct index clearing house



price quotation EUR / metric ton



product North Europe Hot Rolled Coil


grade Prime mild carbon steel EN10111 DD11 (or equivalent)

gauge / width 2.0 mm + / 1250 1600 mm

coil weight 10 25 metric tonnes


extras (e.g. non-standard dimensions) Excludedprice point Net effective base price, ex-mill / N Eur Base Point

swap specifications




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China Rebar / Cleartrade Steel /LCH.Clearnetproduct index clearing house


lot size 20 metric tons

price quotation USD



product China Rebar

index Cleartrade Steel Index ( Provided by Umetal )

grade In the category of Q235

quantity Standard spot-market order size of 100 mt and above

diameter 16 25mm

material surcharges (e.g. scrap surcharge) Excluded

extras (e.g. non-standard dimensions) Excludedprice point Prices sourced from 25 major cities across China

swap specifications




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China HRC / Cleartrade Steel /LCH.Clearnetproduct index clearing house



price quotation USD / metric ton (converted from CNY index)



product China Hot Rolled Coil

index Cleartrade Steel Index ( Provided by Umetal )

grade In the category of Q235

quantity Standard spot-market order size of 100 mt and above

gauge / width 4.75 mm / 1500 mm x C

material surcharges (e.g. scrap surcharge) excluded

extras (e.g. non-standard dimensions) excludedprice point prices sourced from 25 major cities across china

swap specifications




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USA HRC / CRU / CME Clearportproduct index clearing house

clearing house CME Clearport

lot size 20 short tons

price quotation USD

trading months 24 consecutive months


product US Midwest Hot Rolled Coil

index CRU

grade For commercial quality

gauge / width Extras excluded

coil weight > 40,000lbs


extras (e.g. non-standard dimensions) Excludedprice point Net effective base price, ex-mill

swap specifications




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.1 Overview of Scrap Metal

.2 A Common Problem

.3 What is a Swap?


.5 Summing Up

. + &ext Steps Q A

Agenda


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In Summary

ndices Third party price assessments that provide industry transparency Swaps , -A risk management tool that provides a flexible cost effective and

complementary alternative to physical risk management

learing A safety net to protect against counterparty default reight Investor Services The world leading broker of steel and iron ore swaps

and pioneer of cash settled swaps contracts

IS Reports ( )A quick and free way to keep up with daily spot index and forward( )swaps pricing for a wide range of steel products

: / / . / -et them free at http bit ly steel reports


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http://bit ly/steel-reports Freight InvestorS i

Thank you, Next Steps and Q&A

et our free teel market reports + forward rice curvesby email | .teel@freightinvestor comonline | : // . / -ttp bit ly steel reports

/tact Arthur Sam for a elephone or ersonal consultationin person | , ,0 Cannon Street London EC4N 6HL

by telephone | + ( )4 0 207 090 1126online | : // . / -ttp bit ly steel swaps

1st

2nd

& - Q A Please don t hesitate to ask us questions via the Webinar chat window

.hank you for listening

he Steel IndexTSI give excellent presentationson scrap metal and finished

product markets that we andour clients have found

.extremely useful in the past

For more information on eithertheir indices or their free

presentations we recommend a:call to

im Hard ( )Head of Steel+44 20 7645 9415

aseem Karbhari ( )Sales+44 20 7645 9415

Steel and Scrap Swaps Webinar

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Transcript of Steel and Scrap Swaps Webinar