Hedging Tools for the Ferrous Metals Marketplace. Young-Jin (Jin) Chang Director Research & Product Development March 11, 2013

Transcription

1 Hedging Tools for the Ferrous Metals Marketplace Young-Jin (Jin) Chang Director Research & Product Development March 11, 2013

2 CME Group: The Leader in a Dynamic Industry A diverse and world leading derivatives exchange Formed by the 2007 merger of the Chicago Board of Trade and Chicago Mercantile Exchange; followed by the 2008 acquisition of New York Mercantile Exchange (The oldest of the three, CBOT was founded in 1848.)

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4 CME Group: Central Counterparty Clearing OTC Market Without a Central Clearing Counterparty OTC Market With a Central Clearing Counterparty Buyer Buyer Multiple Bilateral Agreements Seller Seller Buyer Buyer CME Clearing Seller Seller Buyer Seller Buyer Seller Buyers and sellers consummate deals on their own Sellers must accept each buyer s credit Buyers must accept each seller s credit Pricing is differentiated by quality of counterparty Buyer and seller have to negotiate to close out a trade Buyers and sellers execute trades with each other Buyers and sellers submit trades to CME for clearing Buyer and seller are guaranteed performance by CME Clearing Buyer and seller no longer have credit exposure to one another Parties close out transactions with whomever provides the best price 4

5 Contract Specs and Market Data

6 CME Virtual Steel Mills: Ferrous Product Listings Steel Iron Ore Scrap Coking Coal Hot-Rolled Coil (CRU: US) 62% FE, N. China (Platts) Ferrous Scrap HMS 80/20 (Platts: Turkey) Australian Coking Coal Hot-Rolled Coil (Platts: European) 62% FE, China (TSI) Ferrous Busheling Scrap (AMM: US) Steel Billet (Platts: Black Sea)

7 U.S. Midwest Domestic Hot-Rolled Coil Index Futures Product Symbol Venue Contract Size Hours All times are NY/EST Unit Price Globex: HRC ClearPort: HR CME Globex, CME ClearPort 20 Short Tons CME Globex: Sunday-Friday 6:00 p.m. 5:15 p.m. with a 45 minute break each day beginning at 5:15pm CME ClearPort: Sunday-Friday 6:00 p.m. - 5:15 pm with a 45 minute break from 5:15PM to 6:00PM Valued in U.S. Dollars and Cents per short ton Minimum Price Fluctuations $1.00 per dry metric ton Listed Contract Months Trading is conducted for 24 months Floating Price The floating price for each contract month is equal to the average price calculated for all available price assessments published for that given month by the CRU U.S. Midwest Domestic Hot-rolled Coil Steel Index. Settlement Type Financial Exchange Rules Contract specifications are in Chapter 920 of the NYMEX rulebook 7

8 U.S. Midwest Domestic Hot-Rolled Coil Index Average Price Options Underlying Futures Product Symbol Venue Contract Size Hours All times are NY/EST Contract Unit Price Quotation Option Style U.S. Midwest Domestic Hot-Rolled Coil Steel Index Futures HRO CME ClearPort, Open Outcry (New York) 20 Short Tons CME ClearPort: Sunday-Friday 6:00 pm- 5:15 pm ET with a 45 minute break from 5:15pm to 6:00pm ET Open Outcry: Monday Friday 9:00 am 2:30 pm ET U.S. Midwest Domestic Hot-Rolled Coil Steel Index Futures U.S. dollars and cents per ton European Minimum Fluctuation $1.00 per ton Expiration of Trading Listed Contracts Strike Prices Settlement Type Trading terminates on the business day prior to the last Wednesday of the named contract month. 24 consecutive months One (1) fifty-cent increment strike prices above and below the at-the-money strike price available for trading in all option contract months Financial Exchange Rules Contract specifications are in Chapter 1095 of the NYMEX rulebook 8

9 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 U.S. Midwest HRC Futures Monthly Volume and Open Interest 18,000 16,000 14,000 12,000 10,000 8,000 monthly volume month end open interest 6,000 4,000 2,000 0

10 U.S. Midwest HRC Options Monthly Volume and Open Interest monthly volume month end open interest Aug,2012 Sept,2012 Oct, 2012 Nov, 2012 Dec, 2012 Jan, 2013 Feb, 2013

11 US Midwest #1 Busheling Ferrous Scrap (AMM) Futures Contract; Launch Date: 9/10/2012 Product Symbol Venue Contract Size Hours All times are NY/EST Unit Price U.S. Midwest #1 Busheling Ferrous Scrap (AMM) Futures (BUS) CME Globex, CME ClearPort 20 Gross Tons CME Globex: Sunday-Friday 6:00 p.m. 5:15 p.m. with a 45 minute break each day beginning at 5:15pm CME ClearPort: Sunday-Friday 6:00 p.m. - 5:15 pm with a 45 minute break from 5:15PM to 6:00PM Valued in U.S. Dollars and Cents per gross ton Minimum Price Fluctuations $0.01 per gross ton Listed Contract Months Floating Price Settlement Type Trading is conducted for 24 months The floating price for each contract month is equal to the 10 th of the month for the price assessment published for that given month by the AMM U.S. Midwest #1 Busheling Ferrous Scrap Index. If 10 th calendar day falls into a holiday or weekend, the price will settle on the immediate following business day. Business days are based on the U.S. Public Holiday calendar. Financial Exchange Rules Contract specifications are in Chapter 601 of the NYMEX rulebook 11

12 U.S. Scrap Futures Monthly Volume and Open Interest monthly volume month end open interest Sept,2012 Oct, 2012 Nov, 2012 Dec, 2012 Jan, 2013 Feb, 2013

13 Bid and Offers are posted on the website Scrap Futures available via CME Group DataSuite 13

14 Bid and Offers are posted on the website Scrap Futures available via CME Group DataSuite 14

15 Daily Settlements, Volume and Open Interest 15

16 Hedging Examples

17 Why should a firm manage risk? Better forecast your earnings quarterly, semi-annually and annually and smooth out cash flow Reduce Debt Cost: Better collateralization Improve long-term planning and budgeting Better credit rating and lower your borrowing cost Ability to sell/buy at a fixed price up to 2 years Become a niche market supplier Focus on the core business instead of speculating = Increased Shareholders Value for both public and private companies 17

18 How Hedge can be used. - Steel Producer: Consumer A would like to buy 1Q, 2013 at fixed price. You can now go to futures market to see where you can buy the scrap for 1Q, You put in your margin and other cost and provide your customer with a fixed price. - Scrap Processor: You re bidding on a demolition project that will take one year to take it apart. You have to bid at fixed price. Now you can look at futures and sell some of the tonnage in advance with fixed margin to take off the price volatility risk. = If you fixed the price and margin, you should be indifferent about the market swing. 18

19 Quotes from the North American steel industry regarding ferrous risk management tool The futures have helped hedge our inventory many times, adding that practice has steadied earnings for the company. most of our business is contract and most of that is on fixed price and hedging helps mitigate profit swings It has allowed us to create solutions for our customers by being able to provide fixed-price solutions for them, If you look at other commodities such as aluminum, it isn t based off negotiations. It s based off the LME index, and we believe that steel will get to that point at some time. We get involved in hedging programs to reduce volatility and increase price value "I was covering busheling tons to lock in margins" 19

20 CME Group Contact Details Chicago Young-Jin (Jin) Chang Bernie Muich New York Bob Biolsi Bob.Biolsi@cmegroup.com Miguel Vias Miguel.Vias@cmegroup.com London Harriet Hunnable Harriet.Hunnable@cmegroup.com Martin Evans Martin.Evans@cmegroup.com 20

21 Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The Globe Logo, CME, Chicago Mercantile Exchange, and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all cases concerning contract specifications. 21