INTERVIEW: Taiwan scrap futures contract would be ‘game changer’ for Asian markets, Idoru’s Fruchter says

Idoru Trading’s Nathan Fruchter knows how it feels to be ahead of the curve in the Asian steel scrap markets. The New York-based trader sold his first cargo to Bangladesh in the late 1980s and his first containers to Vietnam in the early 2000s - back in the infancy of both markets.

Fruchter was also an early riser in his calls for a Taiwan ferrous scrap futures contract, having lobbied for such a derivative back in 2015 when the London Metal Exchange launched its Turkish import scrap contract.

Fruchter explains in an exclusive interview with Fastmarkets why a steel scrap futures contract based on the containerized Taiwan import market would be a crucial turning point for Asian scrap trading.

“I am confident that if an Asian ferrous scrap contract in containers is launched, that most scrap buyers would look at it closer. And many would even trade it - far more than the Turkish buyers do,” Fruchter said.

“The Asian buyers don’t even look at the LME Turkish ferrous futures contract, although they do follow the physical sales prices, regardless if they are in India, Thailand, South Korea or Taiwan.”

“I feel that a Taiwan contract would be a game changer for all Asian dealers,” he added.

Taiwan’s import market for United States-origin containers of HMS 1&2 (80:20) is seen by participants as highly favorable for benchmarking due to the standardized material quality sold from US West Coast sellers, its well-established status as a containerized scrap trade route and high liquidity.

Since 2015, Fastmarkets has published a price assessment for steel scrap HMS 1&2 (80:20 mix) (US material) import, cfr Taiwan. But in July 2019 and before any of its competitors, Fastmarkets moved to a daily frequency, in a move aimed at capturing in greater detail the price movements for the steelmaking raw material.

In 2019, the US sold 1.89 million tonnes of scrap to Taiwan - that was more than US vendors sold to any other single country outside of Turkey.

Fastmarkets has rapidly expanded its Asian ferrous scrap coverage in early 2020, adding new prices for the steel scrap markets of Bangladesh, South Korea and Japan, with more additions planned for the rest of the year.

Driving liquidity
The success of any exchange-linked contract ultimately comes down to how often it is traded.

A derivative contract based on a containerized Taiwan import price would make it easier for market participants to create liquidity than on the existing Turkey bulk contract, according to Fruchter.

“The physical contract size has everything to do with the liquidity of these contracts. With 10-tonne size ferrous futures contracts, it is far easier to cover in a 500-5,000-tonne Taiwan contract, than a 30,000-tonne Turkish deal,” he said.

The risk and inconvenience of trading these container-based contracts is therefore also much lower than on a bulk market, he said.

The larger number of traders, suppliers and buyers active in the Taiwan import market also vastly outnumbers the tally of market participants involved in the Turkey bulk import market, which could also lend itself to creating more liquidity.

“I can see how many Asian mill owners, once they familiarize themselves with a Taiwan contract, would trade it - not just to cover their exposures but also to buy and sell futures,” Fruchter said.

De-risking container scrap trades
Establishing a containerized scrap contract would be not only appealing for traders - but such a contract is entirely necessary in order to manage risk - argues Fruchter.

Containerized scrap trading is fraught with risks which are commonly not hedged by market participants.

Traders in the Indian import scrap market tell Fastmarkets that price decreases in container scrap markets can often lead to buyers defaulting on deals in order to find a lower price in elsewhere. A similar scenario can occur when sellers believe they can obtain a better price in a rising market.

Exposure to price changes during voyage time is another potential problem in the container scrap trade.

“We hear of far more containers arriving at ports without any takers, because some traders often ship out containers planning to sell these once they are a week away from reaching destination. Nobody in their sound mind would ever dare such a thing with a bulk shipment,” he said.

“Some Caribbean and Latin American containers can take as long a 60-70 days to reach their destination. And there’s often an additional 2-3 weeks’ time lapse from the contract to sailing date. The price can swing quite a bit during this period,” Fruchter said, pointing out that the time between the contract signing and receipt of material in the bulk scrap market to Turkey is considerably shorter.

Fastmarkets’ price assessment for steel scrap HMS 1&2 (80:20 mix) (US material) import, cfr Taiwan was $203-205 per tonne on April 1, a decline of $68 per tonne from $272 per tonne at the end of last year. The drop over that period equals exactly 25% of the December 31 price.

Moreover, some buyers who import and discharge containers of scrap at their yards may sell to a steel mill in local currency as long as four months after the bill of lading date, which could leave them heavily exposed to currency swings, according to Fruchter.

“Just for these reasons, the buyers or sellers of container scrap contracts could use a Taiwan futures contract,” Fruchter said.

Lighting dark areas
Fruchter says that the Taiwan import market currently lacks the level of transparency seen in the Turkish market.

“Most Turkish sales agents, even though they act on behalf of the seller, are all friends with one another. There are no secrets when it comes to deals done or price concluded. As soon as a deal is done, it’s out on the wire and it’s already going viral,” he said.

“Back to Taiwan, it is nothing like that. Quite to the contrary. The various Taiwan agents do not have this comradery which the Turkish enjoy. They are far more reserved and have no intentions of sharing details of their sales concluded,” he said.

He acknowledged that changing the trading environment within the market would be difficult, but says an Asian scrap derivative may help.

“If ever a Taiwan ferrous future contracts would be offered, then I believe that would also be the beginning of more transparency in the Taiwan market,” he said.

Many participants also believe that the time has come for an Asian scrap contract given the region’s rising importance in the market.

Fruchter is no different and cites India, Pakistan, Bangladesh and Vietnam as four growth markets to watch over the coming years.

“Asia is and has been, on the move my entire career. They are very ambitious people, determined to succeed and their economies and growth rate bears witness to that,” Fruchter said.

“All this this translates into building, growing the economy, which requires steel, and which requires ferrous scrap,” he added.

More information about Fastmarkets’ expanded Asian scrap coverage can be found on our new Asia Steel Scrap Spotlight.

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