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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?
.4 Solving our Problem
.5 Summing Up
.6 + &Next Steps Q A
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
.6 + &Next Steps Q A
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
.6 + &Next Steps Q A
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
Confused !? No Problem all us on + 4 20 7090 1126 or mail usat .teel@feightinvestor com and we llwalk you through it
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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
Confused !? No Problem all us on + 4 20 7090 1126 or mail usat .teel@feightinvestor com and we llwalk you through it
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?
.4 Solving our Problem
. 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
clearing house LCH.Clearnet
lot size 20 Metric Tons
price quotation EUR / metric ton
trading months Up to 24 Months Ahead ( Mths, Qrtrs & Yrs )
settlement Cash settled
product South Europe Hot Rolled Coil
index The Steel Index
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
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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N Europe HRC / The Steel Index /LCH.Clearnetproduct index clearing house
clearing house LCH.Clearnet
lot size 20 Metric Tons
price quotation EUR / metric ton
trading months Up to 24 Months Ahead ( Mths, Qrtrs & Yrs )
settlement Cash settled
product North Europe Hot Rolled Coil
index The Steel Index
grade Prime mild carbon steel EN10111 DD11 (or equivalent)
gauge / width 2.0 mm + / 1250 1600 mm
coil weight 10 25 metric tonnes
material surcharges (e.g. scrap surcharge) Included
extras (e.g. non-standard dimensions) Excludedprice point Net effective base price, ex-mill / N Eur Base Point
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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China Rebar / Cleartrade Steel /LCH.Clearnetproduct index clearing house
clearing house LCH.Clearnet
lot size 20 metric tons
price quotation USD
trading months Up to 24 Months Ahead ( Mths, Qrtrs & Yrs )
settlement Cash settled
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
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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China HRC / Cleartrade Steel /LCH.Clearnetproduct index clearing house
clearing house LCH.Clearnet
lot size 20 Metric Tons
price quotation USD / metric ton (converted from CNY index)
trading months Up to 24 Months Ahead ( Mths, Qrtrs & Yrs )
settlement Cash settled
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
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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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
settlement Cash settled
product US Midwest Hot Rolled Coil
index CRU
grade For commercial quality
gauge / width Extras excluded
coil weight > 40,000lbs
material surcharges (e.g. scrap surcharge) Included
extras (e.g. non-standard dimensions) Excludedprice point Net effective base price, ex-mill
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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.1 Overview of Scrap Metal
.2 A Common Problem
.3 What is a Swap?
.4 Solving our Problem
.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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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