How NYMEX’s Steel Futures Contracts Relate to the Physical ...

[Pages:4]RICHARD STEVENS, EXECUTIVE DIRECTOR, CME GROUP

How NYMEX's Steel Futures Contracts Relate to the Physical Steel Markets

MARCH 2019

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

The steel industry is a central part of the global economy. According to the World Steel Association, global steel production was over 1.8 billion metric tons in 2018, an increase of 4.6% on the previous year 1. Alongside growth in the physical market, the use of NYMEX's steel derivatives has also increased in recent years, as increased price volatility drives a need for commercial hedging strategies 2.

World Crude Steel Production

US Crude Steel Production

Source: World Steel Association 3

China now accounts for over half of global production of steel 4. India has overtaken Japan to be the world's second largest producer. The top six producing nations produce three quarters of global output 5.

International trade in steel equated to approximately 277 million tons in 2017, or 16.1% of production 6. However, much of the steel that is consumed domestically is used to make components and finished products which are also traded internationally.

The United States is the fourth largest steel producing nation, producing 86.7 million metric tons in 2018 7. U.S. output grew 6.2% in 2018, although production volumes in the U.S. have experienced both ups and downs in recent years.

Source: World Steel Association 8

The U.S. is also a net importer of steel. When imports and exports are factored in, apparent consumption was nearly 100 million metric tons in 2017 9.

Steel is produced in a wide variety of formats, to serve the variety of purposes it is put to, e.g. construction, railroads, consumer goods. In the U.S., flat steel ? used in the manufacture of automobiles and appliances (amongst other things) ? accounts for approximately 75% of steel production. In comparison, flat steel production in India is just over 50% of the total, and in China it is approximately 40% of the total 10.

Hedging hot rolled coil steel

NYMEX offers futures contracts on U.S. hot rolled coil steel. Hot rolled coil is the most significant by volume of the flat steel products, and hot rolled coil prices can be seen as a marker for the wider flat steel sector. Traded volumes in NYMEX futures have been increasing in recent years.

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MARCH 2019

NYMEX Hot Rolled Coil Futures Volume

Source: CME Group

Traded volume in NYMEX hot rolled coil steel futures grew 89% in 2018 compared to 2017, which in turn was 17% higher than in 2016. The NYMEX futures ? officially known as U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index Futures ? are financially settled contracts linked to the price assessment for hot rolled coil in the US Midwest published by CRU, which is widely used in physical steel transactions. Each hot rolled coil steel contract traded at NYMEX has a unit size of 20 short tons. Prices are quoted in U.S. dollars per short ton. The contract is available to trade on the CME Globex electronic trading platform 23 hours a day, and privately negotiated transactions can be submitted to clearing via CME ClearPort. In 2018, 30% of hot rolled coil futures volume was traded electronically. In 2018, physical and futures market prices were affected by the introduction of tariffs of 25% on U.S. imports of steel. The latter part of the year saw steel prices falling around the globe. These dramatic changes in price highlight the benefits of hedging price risk.

NYMEX Hot Rolled Coil Futures Prices

Source: CME Group

Hedging ferrous scrap

Recycling is a prominent feature of the steel industry. It has been estimated that the U.S. processed 62 million metric tons of ferrous scrap in 2017 11, with most of this being used as a feedstock for new domestic steel production. The NYMEX U.S. Midwest Busheling Ferrous Scrap (AMM) Futures contract provides a risk management tool for the ferrous scrap industry. It is financially settled with reference to the price assessment for busheling scrap published by Fastmarkets AMM. Each busheling scrap steel contract traded at NYMEX has a unit size of 20 gross tons, with prices quoted in U.S. dollars per gross ton. Traded volume observed in NYMEX's scrap steel futures in 2018 was nearly 14 times higher than 2017 volume.

NYMEX Busheling Ferrous Scrap Futures Volume

Source: CME Group

Increased domestic U.S. steel production in recent years has resulted in greater demand for scrap, and higher prices for scrap steel have been seen.

NYMEX Busheling Ferrous Scrap Futures Prices

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Source: CME Group

Conclusion

Steel prices have seen substantial movements in recent years. The price range over the past two years for hot rolled coil steel futures covers around $350, or over 50% of the current prices. With this level of volatility, steel industry firms have been embracing risk management strategies throughout the value chain, as can be seen in the increased NYMEX futures volumes.

MARCH 2019

1 World Steel Association. See Press Release dated 25 January 2019 . 2 NYMEX volume for 2018 was 89% higher than volume 2017. Volume for 2017 was 17% higher than 2016. 3 World Steel Association. Steel Statistical Yearbook 2018 , amended to in include 2018 data based on

press release dated 25 January 2019, and to amend 2017 production data for China per the press release of 25 January 2019. 4 World Steel Association. See Press Release dated 25 January 2019 . 5 World Steel Association. See Press Release dated 25 January 2019 . Top six

producer nations referenced are China, India, Japan, U.S., South Korea and Russia. The reported combined production of these six nations is 1,370 million tons, or 75.7% of the total. 6 Based on exports data from UN Comtrade Database . Reference is to semi-finished and finished steel product, excluding stainless and alloy steels, HS Codes: 7206, 7207, 7208,

7209, 7210, 7211, 7212, 7213, 7214, 7215, 7216 and 7217. 7 World Steel Association. See Press Release dated 25 January 2019 . 8 World Steel Association. Steel Statistical Yearbook 2018 , amended to in include 2018 data based on

press release dated 25 January 2019. 9 U.S. crude steel production from World Steel Association Steel Statistical Yearbook 2018, plus net imports (imports minus exports) from UN Comtrade Database for HS Codes: 7206, 7207, 7208, 7209, 7210,

7211, 7212, 7213, 7214, 7215, 7216 and 7217. 10 Data for 2017 from World Steel Association Steel Statistical Yearbook 2018. Figures quoted are hot rolled flat production (table 13) as a percentage of hot rolled products production (table 11). 11 US Geological Survey, Iron and Steel Scrap Commodity Summary 2018, apparent consumption: .

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Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments 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 either a futures or swaps 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 traders cannot expect to profit on every trade.

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The information within this communication has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this communication 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 superseded by official CME, CBOT, NYMEX and COMEX rules. Current rules should be consulted in all cases concerning contract specifications.

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