CME Group Inc., the owner of the world’s biggest futures exchange, is betting that a surge in demand for recycled steel and price swings will drive trading in its new scrap futures.
The contract will be the first ferrous-scrap futures available to the U.S. steel industry, according to Chicago-based CME Group. The market opened yesterday on the company’s Globex electronic platform. It will complement hot-rolled coil steel derivatives that the exchange already offers, said Youngjin Chang, the director of metals research and product development at CME Group.
The CME and the London Metal Exchange started steel futures in 2008 amid concern from producers including U.S. Steel Corp. and ArcelorMittal that it would fuel speculation. World demand for scrap steel this year will be 530 million metric tons, 24 percent more than in 2009, according to Ken Hoffman, an analyst at Bloomberg Industries in Skillman, New Jersey. The size of the global crude-steel market is about 1.5 billion tons, he said.
“Historically, there has been skepticism from steel mills and others in the industry about using derivatives,” said Joe Pickard, the chief economist at the Institute of Scrap Recycling Industries Inc., a Washington-based trade group. “There might be more interest today than in years past though, because with the volatility we’ve seen, people may be more willing to use them for hedging.”
The contract will be settled against American Metal Market’s U.S. Midwest Ferrous Scrap Index. No bids, offers or trades were reported after trading started at 5 p.m. Chicago time yesterday. The price of shredded-steel scrap surged 20 percent last month after slumping 6.7 percent in July, according to Steel Business Briefing data. The commodity declined 11 percent to $407.50 a long ton (1.02 metric tons) this year.
CME offers contracts in currencies, equity indexes, interest rates, energy, agriculture and precious metals. The LME handles about 80 percent of trade in industrial-metal futures, setting global prices for metals from copper to aluminum to nickel.
Nucor Corp., the largest U.S. steelmaker by market value, said in June that lower scrap-steel prices were hurting its recycling business. Katherine Miller, a spokeswoman at the Charlotte, North Carolina-based company, declined to comment on the new futures contract.
Schnitzer Steel Industries Inc., a recycler of used steel, forecast last month quarterly profit that was lower than analysts’ estimates and said it will cut 300 jobs. Chip Terhune, a spokesman for the Portland, Oregon-based company, didn’t immediately return a call seeking comment.
Ferrous-scrap traders accustomed to spot markets may be reluctant to use futures, said Mark Lewon, the president of Utah Metal Works, a Salt Lake City-based company recycling scrap.
Steel-billet trading on the LME totaled 5,811 contracts in June, the lowest since February 2010, bourse data show. Volume in the exchange’s aluminum contract exceeded 5 million contracts. Billet is “under scrutiny” and may need “fine- tuning,” LME Chief Executive Officer Martin Abbott said in June. LME shareholders agreed to a $2.2 billion takeover offer from Hong Kong Exchanges & Clearing Ltd. in July.
Daily volume in the CME’s domestic hot-rolled coil steel index futures peaked at 536 contracts in August, compared with as much as 90,793 for the copper contract traded on the Comex unit in New York, bourse data show. Steel derivatives are still relatively new and there’s a “long-term learning curve,” CME’s Chang said.
Scrap-steel demand in China will increase to 59.2 million tons this year, almost 50 percent more than in 2008, Bloomberg Industries data show.
“Scrap metal is one of the last few major commodities without a futures contract, so there’s a big market there that could be traded,” said Jason Schenker, the president of Prestige Economics LLC, an Austin, Texas-based consultant. “The question is whether the players in the market will use the contract.”
Trading in ferrous derivatives has surged in China. More than 5.9 million contracts changed hands in the Shanghai Futures Exchange’s January contract for reinforcement bars, or rebars, on Sept. 7, bourse data show. The SFE is considering contracts for iron ore and hot-rolled coil.
Trading in iron-ore swaps and options rose to a record 17.8 million tons in August as prices dropped to a two-year low, The Steel Index, a publisher, said Sept. 4.
The National Commodity & Derivatives Exchange Ltd. in India said in July it plans to start trading scrap-steel futures this year to meet demand for a hedging tool.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.