***COMMENT: Swap Shop – MB announces new Ferrous Scrap Turkey Index

Price risk management is in vogue.

Price risk management is in vogue.

This week heralds the launch of the London Metal Exchange’s cobalt and molybdenum contracts. It will be interesting to see how trading develops around these latest additions to the LME stable.

But price volatility, and the risk associated with it, is not limited to the markets for which exchange-traded futures contracts have already been developed, as MB readers will be very aware.

Last year saw the launch of the Metal Bulletin Iron Ore Index (MBIOI), designed to provide the most accurate measurement of iron ore prices cfr China, market transparency, and to enable market participants to settle both physical and financial contracts.

Growth in the market for over-the-counter iron ore swaps has been fast and sustained. Market participants estimate that swaps equivalent to more than 20 million tonnes of iron ore have now been traded.

Several leading investment banks have established teams to pioneer their businesses in this new area, and more will follow. Exchanges and clearing houses have already begun to think carefully about how they will tailor their services and capture some of this liquidity.

The LME is one of these, sources with knowledge of the situation say.

This interest is by no means accidental — over the past few years the market for steelmaking raw materials has become an increasingly volatile environment as the rapid growth of steel production and shift of emphasis to the Far East saw a vastly expanded spot market and disrupted traditional supply chains.

Few markets have been more volatile than ferrous scrap, and few have caused electric arc furnace-based steelmakers a bigger headache.

Mini-mills say ferrous scrap prices have risen far quicker than bookings for finished products, shrinking their margins and, in some extreme cases, forcing them to reduce production.

After posting massive 70% declines as steel prices fell in late 2008 and early 2009, fob Rotterdam HMS 1&2 (80:20 mix) ferrous scrap prices have already risen 60% as mills were forced to restock.

The need for an effective price risk management tool seems evident, and some industry players have already begun to make exploratory moves towards providing them.

The first step is transparency, and Metal Bulletin is delighted to announce the launch of its Ferrous Scrap Turkey Index.

Like the MBIOI, this new Index has been developed to provide the most accurate and transparent appraisal of the market for ferrous scrap being imported by Turkish consumers.

MB has already built a history of six months for this index, and we hope it will quickly be adopted as a valuable benchmark for physical business, but also for a wave of new tools designed to provide a hedging mechanism.