Tsi istanbul seminar

TSI Steel and Scrap Seminar

Putting steel and scrap price volatility in their place

Jarek Mlodziejewski

Istanbul September 24, 2013

This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives, financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not necessarily a guide to future performance.

Unless expressly stated, we do not make any representations nor give any warranties in respect of the information contained in this presentation. To the extent permitted by the applicable law, we hereby exclude all warranties, conditions, representations or duties whatsoever and howsoever arising (whether express or implied) including but not limited to any representations or warranties as to the ownership of intellectual property or other rights in the presentation, or the satisfactory quality, merchantability or fitness for a particular purpose of, any goods or services referred to at any time in this presentation, any express or statutory warranties, and any warranties or duties regarding accuracy, timeliness, completeness, performance, availability, lack of negligence or of workmanlike effort.

To the fullest extent allowed by applicable law, you agree that we will not be liable to you or your business under any circumstances whatsoever (whether in contract, negligence or any other tort, breach of statutory duty or otherwise) for any loss of profits, income, business interruption, loss of business information or for increase in any costs, liabilities or expenses or any other loss whatsoever and however arising directly or indirectly out of or in connection with or relating to the information in this presentation and we shall not be liable for any loss, damages, costs, expenses or other liability which you incur or suffer as a result of your use of the information in this presentation.

We take all such steps as are reasonably necessary to provide information that is accurate and reliable, but exclude to the fullest extent permitted by law any liability for the inaccuracy of the information in this report.

The Steel Index (TSI) used all reasonable endeavours to certify the correctness of the information contained in this presentation.

Without limiting the above, you acknowledge and agree that we shall not be liable for matters beyond our reasonable control including but not limited to information gathered during field visits, third party information presented or the acts of third parties.

You understand and expressly agree that use of the information presented here is at your sole risk, that any content, material and/or data presented or verbalised or otherwise obtained through your use of the information in this presentation is at your own discretion and risk and that you will be solely responsible for any damage to you personally or your company or organization or business associates whatsoever which in any way results from the use, reliance or application of such content material and/or data and/or information.

All INFORMATION PRESENTED IN THIS REPORT IS AGREED TO BE CONFIDENTIAL AND CANNOT BE REPRODUCED WITHOUT THE EXPRESSED PERMISSION OF THE STEEL INDEX

Disclaimer

Agenda

• Introduction to TSI and Methodology • Ferrous risk management opportunities

• What are the contracts? • What can I do with a contract?

Introduction

TSI operates from offices in London, Singapore, Shanghai and Pittsburgh

Impartial organisation focused on compiling prices for ferrous metal products

Data-driven methodology

Founded in in 2006 as subsidiary of the Steel Business Briefing (SBB) Group

Acquired by Platts in July 2011

Continues to operate under TSI brand as a separate unit within Platts, part of McGraw-Hill Financial

Specialist price information service

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Platts purchased TSI (and SBB) on July 1, 2011

TSI remains a separate operation within Platts

TSI team is distinct from Platts editorial and pricing teams

TSI continues compiling and developing its price indices using the same data-driven, transaction-based methodology, under the TSI brand

TSI data and index systems remain completely separate from Platts’ price assessment data and systems

Confidentiality of TSI’s Data Providers and their submissions remains assured (no access for Platts’ editorial or pricing teams)

TSI’s subscription services and reports continue as distinct offerings

TSI within Platts

Coverage

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

Regions covered

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

Iron Ore 62% Fe Fines* 58% Fe Fines* 63/63.5% Fe Fines* 62% Fe (2% Al) Fines* 65% Fe 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*

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Key principles: – to maximise industry participation and the accuracy of data

submitted – to minimise opportunities for manipulation and subjectivity in

the compilation of each index

TSI uses the same approach for compiling all its iron ore, steel, scrap and coking coal reference prices: – legal agreements with relevant Data Providers active in the

physical market – secure confidential on-line data collection of actual transactions – prices normalised to reference product specifications – data ‘cleaned’ with outliers excluded – volume-weighted averages calculated and published

TSI Approach

TSI Methodology

Data-driven methodology using transaction data to calculate volume-weighted price indices

TSI “Data Providers” submit spot transaction data to TSI under confidentiality agreement

Physical market participants only (over 550 registered today)

Representatives from all relevant points of the supply chain, buy and sell sides

Submission direct to TSI database through secure on-line channel

Data normalised and “cleaned” before volume-weighted averages calculated for the day or week

Agenda

• Introduction to TSI and Methodology • Ferrous risk management opportunities

• What are the contracts? • What can I do with a contract?

You can’t predict the future

But you could better prepare for it through hedging

$300

$350

$400

$450

$500

$550

CFR Turkey HM 1/2 80:20 US$/tonne

Yes, YOU HAVE RISK if: You buy scrap on the international market You buy semi/finished steel from Black sea mills You sell steel products Oh really; WHY, exactly do I have risk? Because you are working on floating (not fixed) prices. In other words, you know your costs, but not your margins (until sales time). Not having a full order book or not knowing who will buy your steel is a risk. ‘If you are not hedging, you are speculating’. Derivatives sound dangerous They can be…so is a baseball bat, if used for the wrong purpose. Hedging, done correctly, is conservative by nature. Leave speculation to other industries! We’ve worked fine up till now It’s been a ‘Goldilocks’ time: everything’s been just right. Especially exploding export demand. But, is demand going to be so inelastic going forward? Fatalism. Is “some month’s we’re up, some we’re down – it goes around” a sound foundation for a business?

Do I have risk?

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

$330$340$350$360$370$380$390$400$410$420

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

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.

A processor would have avoided about US$4 million in revenue deterioration Jan - Sept

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.

330340350360370380390400410420

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:

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

A buyer may have saved close to US$2.5 million had they have hedged at the bottom

$0

$100

$200

$300

$400

$500

$600

$700 Fixed conversion cost for rebar. Offer product up to 2 years forward to buyers

Opportunity to offer fixed price contract to buyers, locking in

margins

Fixed raw material cost

Fixed conversion cost + margin (negotiated with buyers)

Forward Curve HMS 1/2 80:20 CFR Turkey

Hypothetical FOB Turkey Rebar

Application of derivatives

Margin Management • If your product output allows you to hedge and you do not, you are

speculating • Derivatives allow you to lock-in a known for an unknown forward price Fixed Pricing for your Customers • Do you or your customers have a need for fixed pricing? • Derivatives allow you to effectively lock-in a known price for your

forecasted raw material for several months or even years in into the future Employing Market Insight • Many of the early entrants to steel hedging have realised the benefits of

employing their knowledge in these markets • Hedging provides considerable flexibility to your businesses • In some cases the use of derivatives makes a considerable difference in

managing cash flow

• An exchange in which the FIXED price is offset against a FLOATING rate for a certain period

• Swaps are financially settled with the floating price component usually referenced to a monthly, quarterly, semi-annual or annual average of any mutually agreed index

• The index in our sample case is the DAILY Heavy Melt Scrap (HMS) 1 & 2, blended in an 80:20 Mix Turkish imports CFR Iskenderun price

How does a swap trade work?

– Steel rebar producer is asked by a good customer to offer a FIXED first half 2013 price for 5000 tonnes a month of rebar

– The rebar producer needs about 5500 tonnes a month 80/20 scrap to cover this order

– The scrap industry typically does not offer fixed price contracts

– However, the producer can go to the swaps market and a broker will help find a counter-party to fix a 6 month financial swaps contract


– The steel rebar producer calls her broker who is able to get a 6 month contract, average price US $350 and offers a fixed rebar price of $550 to their customer adding the profit margin, premium & other costs

– The six month Steel rebar FIXED offer of $550 and volume is accepted by the steel billet customer

– The rebar producer BUYS 5500 tonnes a month from January to June FIXED at $350 TSI steel scrap swap contract accepting to sell it at a floating price (the average DAILY price assessments published for that given month by the TSI)


What happens if prices go DOWN? – The rebar producer continues to procure their scrap

requirements as normal on the spot market. – The Steel scrap pricing goes down starting in January

2013 and the TSI settlement average price for January is US $300/tonne

– The steel rebar producer sells its 5500 tons of June TSI contract swaps at US $300/ton with a US $50/tonne hedge LOSS

– The rebar producer has bought physical steel scrap for $50 per tonne LOWER

THE REBAR PRODUCER KEEPS ITS TARGET PROFIT MARGIN SECURED


Presenter

Presentation Notes

Remember, can fix their physical monthly scrap purchases. This works exactly like conversion cargoes, where a trader will sell scrap and buy rebar on a fixed margin.

What happens if prices go UP?

– Steel scrap goes up starting in January 2013 and TSI settlement average price for July is US $375/tonne

– The rebar producer sells its 5500 tons of July TSI steel scrap contract swaps at US $375/ton with a US $25/tonne hedge GAIN

– The rebar producer bought physical steel scrap for an average price of US$375 for $25 per tonne “loss”.

THE REBAR PRODUCER KEEPS ITS TARGET PROFIT MARGIN SECURED



Swap Seller Swap Buyer

Broker

Clearing House

http://www.lchclearnet.com/default.asp

http://www.intlfcstone.com/Pages/default.aspx

http://www.gfigroup.com/home.aspx

http://www.ssyonline.com/index.shtml

Iron ore derivatives and futures markets have continued to grow very strongly in 2013 185 million tonnes cleared basis-TSI during January-August (2.6x higher than for the same period in 2012) Open interest also at record levels on the Singapore Exchange (SGX) Futures contracts launched as market continues to develop/mature: CME, ICE and SGX have all launched screen-traded IO futures since May 2013 to trade alongside derivatives Trading continues to develop in other ferrous swaps contracts: including Turkish scrap imports (TSI) and European HRC swaps (basis-TSI)

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Q1 Q2 Q3 Q4

2009 2010 2011 2012 2013

Iron Ore OTC Derivatives Contracts - Volume Cleared (million tonnes)*

* SGX, CME Group, LCH.Clearnet, NOS Clearing and ICE

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Options

Swaps

SGX Daily Open Interest (RHS)**

Iron Ore OTC Derivatives Contracts - Volume Cleared and OI (million tonnes)*

* Total volume cleared by SGX, CME Group, LCH.Clearnet, NOS Clearing and ICE; Open interest for SGX only ** End of year

The Steel industry is facing up to change, volumes on other contracts

are growing

Further information:

Jarek Mlodziejewski London

+44 207 176 7618

Tim Hard - [email protected] Singapore

+65 6532 2800

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