Steel Swaps - A New Edge

US HRC Steel Options Webinar

FIS recently hosted a webinar in conjunction with CME to explain the methodology and usage of HRC Steel Options and their use in active risk management strategies. To view the video with commentary and Q&A please click here: US HRC Options Webinar.

Register to get our Steel Swaps reports

FIS circulates two daily steel reports - the first a daily digest of market moves, prices and forward curves, the second an update on the four HRC swap settlement indexes. Click on the documents to view samples of the reports and click here to sign up for the reports.

Steel Swaps Report Sample

Steel Index Report Sample

Trading the virtual steel mill

Steel is an indispensable building block of the global economy and the developing economies of Asia. Global steel production in 2000 was 848m tonnes but by 2010 this had grown to 1.4bn tonnes, with an estimated value of over $900bn.

Key to future growth is the continued industrialisation of China. While global crude steel production increased by 44% between 2000 and 2009, Chinese production grew by 342% in the same period to 568m tonnes.

To reflect the structural changes taking place in the steel industry, Freight Investor Services has launched five new steel derivatives contracts, developed in response to market demands for cleared, cash-settled swap products and begun coverage of a sixth.

Six new contracts

The six contracts are for the two main groups of steel and one raw material. FIS offers coverage of the following Hot Rolled Coil contracts: US Domestic, North and South Europe and China. In addition, FIS covers China Domestic Rebar and Turkish Scrap Imports.

The European contracts will settle against The Steel Index (TSI) and the Chinese contracts against the Cleartrade China Steel Index (CCSI) provided by Umetal. The US contract settles against the CRU US Midwest Domestic Hot-Rolled Coil Steel Index.

The contracts increase the range of steel derivatives available and will add to the depth and liquidity of the steel futures market, by offering a timely counterpart to existing physically-delivered contracts.

Traders and hedgers have been advocating the launch of cleared cash settled swaps as a means of managing their price risk and exploiting new market opportunities.

Freight Investor Services strives to be a leader in generating liquidity in the commodity swaps market. There is a strong desire for cash-settled swaps from traders with and without exposure to physical steel market and broker support is fundamental to crystallising this pent-up demand.

Pending regulatory approval, these products will be made available on Cleartrade, the new multilateral trading facility which provides a central market place for freight and other OTC commodity swaps. Cleartrade connects execution to clearing via General Clearing Members, offering straight-through processing and an automated recap service. These products will be launched alongside iron ore and freight on the Cleartrade platform, with coking coal to follow, allowing participants to trade as a complete virtual steel mill.

The Steel Industry

The steel industry is highly segregated with numerous steel products available. Broadly speaking though, steel products can be either classified as flat products, used in the automobile, shipping and white goods industries and long products which are used in the construction industry.

With regard to swaps available for trading, there is a wide array of steel products being used as the underlying market for derivatives. However, the two most common steel products used are Hot Rolled Coil (flat product) and Reinforced Bar (long product). Currently, there are about eight exchanges listing steel derivatives for trading. The Shanghai Futures Exchange has the highest liquidity with daily trading volume for its steel futures exceeding 30m tonnes.

The HRC steel swap offered by FIS involves taking a position in a futures (paper) market as a substitute for a forward cash (physical) transaction.  It is an over the counter, cash settled contract with no physical delivery where both the buyer and seller agree on a price which is settled against an index.

Index Providers

FIS has worked with first-class index providers partners to help make steel swaps a reality.

The Steel Index

The TSI European Hot Rolled Coil (HRC) derivatives enable participants to trade this market for the first time. TSI will initially offer the Northern and Southern Europe contracts as a weekly assessment. TSI works with a broad group of companies that have agreed to submit steel price data based on actual transactions. The 'data provider group' includes steel mills, traders, stockholders, fabricators and end-users in all relevant regions. TSI's steel prices are already an essential tool for steel market participants as an accurate, robust reference for physical transactions.

The Cleartrade China Steel Index

The HRC China contract will use the Cleartrade China Steel Index (CCSI), for which data are submitted by steel industry participants in 25 of the largest Chinese cities involved in steel products trading and collated by Umetal. The participants span the entire Chinese domestic steel industry and include producers, traders, end users and stockists.

An RMB assessment will be published at 17:00 standard China time, at which point it will be converted into a USD price, providing a fresh assessment at 12:00 London time each day.

CRU US Midwest Domestic Hot-Rolled Coil Steel Index

CRU Steel Prices for semi-finished and finished carbon steel products are among the most widely used in the world steel industry.

CRU prices are used in the physical contracts between buyers and sellers of steel - latest estimates suggest that over 50% of direct shipments from US steel sheet mills are now priced against CRU Steel Prices.

They are also used in the models that buyers employ to manage steel price risk. CRU Steel Prices act as the trigger points for surcharges and are entered into thousands of, so-called, 'variable cost contracts' and are used in the settlement of OTC derivative products.

Your next move

For further information on how the new steel derivatives products can help your business please contact Rory MacDonald or Sam Mehew, tel +44 207 090 1120 steel@freightinvestor.com

Click here to get our free steel market reports and index updates.