CME Group busheling contract gains seen as encouraging

Both January and February data show increasing uptake of the contract, which is settled against American Metal Market’s Midwest index for No.1 busheling. January alone was a record month for monthly volume on the busheling futures contract, with 1,467 lots – or 29,340 gross tons – traded, Young-Jin Chang, CME Group’s global head of metals products, told American Metal market in a telephone interview on Friday February 9.

Prior records for busheling were set in May 2013, when trading volumes hit 665 lots.

“You’re seeing increasing interest in terms of the desire to manage risk” from ferrous market participants, including those with well-established interest in older hot-rolled coil (HRC) and iron ore markets, Chang said.

This busheling contract has been in place since 2013, or around five years, but it requires “a lot of education” in the marketplace to get things moving, according to Chang, who spent almost five years at David J. Joseph as a global physical trader before joining CME Group.

Certain “early adopters” of other ferrous contracts now want to see this busheling contract succeed, spurring strong interest, she said.

“So we’re seeing some more sophisticated or ‘early adopter’ types also looking at the busheling scrap contract and ways to utilize that contract,” Chang told American Metal Market.

And consequently, as liquidity improves more scrap market participants in the United States have looked to manage risk with the contract, or help fix their costs or fix busheling prices in future months, she added.

February has been another stellar month for the contract, with some 1,425 lots – or 28,500 tons – traded on February 7 alone. Open interest stood at 4,241 lots as February 12, including 1,514 lots of open interest for the March 2018 contract, according to CME Group data. March 2018 is now quoted at $380 per ton.

Nasdaq Futures Inc. and World Steel Exchange Marketing also recently launched a second ferrous scrap contract that is based on American Metal Market’s Midwest shredded scrap index. But Chang declined to comment directly on whether that launch triggered broader market interest in scrap futures.

“It’s one thing to launch a contract but it takes a lot of time to educate, build the liquidity and get market participants on board,” she said, adding that true success comes when one has “actual commercial participation” on the contract, as the CME Group has had with iron ore, HRC and now busheling.

Still, “I think there is more interest coming on board from the marketplace” broadly on ferrous futures, according to Chang, who oversees CME Group’s full suite of metals, including precious and industrial metals. She has worked within that niche since 2011.

“There’s an incredible amount of education that needs to go into ferrous [products], only because these type of tools are relatively new to the market participants,” she noted.

HRC volumes bounce higher
CME Group’s HRC contract also performed well in January, according to CME statistics sent to American Metal Market.

HRC trading volumes hit 10,435 lots last month, almost double the 2017 monthly average of 5,269 lots traded. Full-year 2017 volumes were 63,229 lots, up 17.3% from 53,884 lots the previous year. 

The full-year 2017 total represents 1.26 million short tons of material, with one lot sized at 20 tons. The prior trading record for monthly HRC volumes was set in April 2016, at 8,567 lots.

In terms of options, 1,530 lots of HRC options – representing some 30,600 tons of material – were traded in 2017, Chang noted.

“Market participants are becoming more sophisticated,” she said of the progress in options use. “They see the value of risk management tools, and more adaptation is occurring.”

CME Group’s emphasis with ferrous products has always been to offer tools for commercial market participants, with investor interest and liquidity in the ferrous arena still a far cry from developed markets such as copper or gold, Chang said, noting for example that gold can trade at 450,000 lots per day for CME Group’s contract.

Still, a “little bit” of investor interest has been seen in HRC recently, with some volume contracted on screen, she said. In the past, trades were all brokerage based. That type of progress could be a “nice next step” for the busheling contract, but only once there’s a good amount of commercial participation.

Liquidity is further boosted once financial participants enter the market, which in turn is a benefit for commercial participants since they have more liquidity and tonnage to exploit – and more means for risk mitigation, Chang said.

“On ferrous specifically, our focus is very much on making sure commercial participants are getting what they need and on the continued educational process,” she said, adding that within CME Group’s busheling and HRC contracts a “vast majority” of the participation is “actual commercial hedging volume.”

That contrasts with CME Group’s copper, gold, silver, platinum and palladium contracts, where there is a “good chunk” of investor participation – even with metals that have an industrial component, such as the latter two, Chang noted.