As has been proven with our existing physically delivered billet contract, the physical delivery of steel is challenging for various reasons:
This has been an extremely customer-focused product launch, and our approach of targeted market engagement has ensured we have created contracts that participants want to trade. Our ferrous suite balances the needs of physical participants looking to hedge their exposure and financial participants seeking risk. Our proposed market-making programme is designed to ensure the new contracts are highly liquid from the outset [subject to regulatory approval]. A significant number of market participants have already expressed an interest in our market-making programme.
These new ferrous futures contracts allow physical users of scrap and rebar to reduce their risk exposure by locking in the prices at which they will buy or sell resources in the future. The contracts will also allow financial traders to gain exposure to the steel market and the broader economy.
We have received strong support from the steel industry and from financial participants for the launch of our cash-settled scrap and rebar contracts. The contracts will complete the supply chain of long steel products from initial inputs (scrap) through intermediate stages (billet) to final products (rebar). This:
LME Steel Scrap and LME Steel Rebar.
The two new ferrous contracts will launch on 23 November 2015.
We’ve chosen to cover the supply chain of long steel products from initial inputs (scrap) through the intermediate stages (billet) to the final products (rebar), benefiting physical participants by allowing them to hedge every step of the value chain; and giving financial participants the opportunity to arbitrage between different stages of the value chain.
The steel industry already hedges its non-ferrous metals through the LME. The steel market is large and it is a natural step for the LME to meet this latent demand from our existing and future customers with an appropriate range of risk management and hedging tools.
The Platts index is based on the export price or rebar, which broadens its appeal to physical customers in different markets. From a technical perspective, pricing in the US dollar improves liquidity and reduces currency risk, while the presence of historical daily prices facilitates the back-testing of trading and hedging strategies.
Turkey is uniquely positioned to provide globally relevant prices, as it is the global trade hub for the scrap and rebar markets. Turkey is the largest exporter of rebar in the world, supplying to countries across North Africa, the Middle East, the US and Europe. Around 70% of the world’s steel produced by the dominant electric arc method comes from Turkey, and the country is also the largest global scrap importer.
After extensive analysis and consideration, we selected the Platts/TSI reference index prices for our new cash-settled ferrous contracts. The chosen reference prices are:
We are confident that these benchmarks and the methodologies used to calculate them are comprehensive, taking account of IOSCO standards, and are highly respected within the steel industry.
As these contracts are cash-settled, the reference index price provider delivers the monthly settlement price, which is the average of the daily prices of the index during the front month.
The forward curve for the ferrous contracts will be calculated based on trades on the LME.
This has been an extremely customer-focussed product launch, and our approach of targeted market engagement has ensured we have created contracts that people want to trade. Our ferrous suite balances the needs of physical participants looking to hedge their exposure and financial participants seeking risk. Our proposed market-making programme is designed to ensure the new contracts are highly liquid from the outset [subject to regulatory approval]. A significant number of physical market participants have already expressed an interest in our market-making programme.
Participants using the LME Steel Scrap contract will not be looking to buy small quantities of physical scrap at a bulk discount price ¬– instead, they want to hedge the price risk of the bulk discount price through a cash-settled contract. Larger quantities can simply be hedged by trading more lots. The LME’s smaller contract size also appeals to non-physical, financial participants, adding to the liquidity of the contract.
The scrap and rebar contracts will be cleared in US dollars. Commodities are predominately traded in US dollars and the LME is consistent with market requirements.
Our ferrous contracts will be traded on our electronic trading platform, LMEselect, from 01:00-19:00 London time. They will also be available to trade 24 hours a day on the LME’s telephone market.
Market participants requested a lot size for these contracts of 10 metric tonnes (mt). A smaller lot size allows hedges to be adjusted to take into account various means of transportation - for example, a 20mt container, 30mt truck load.