Nasdaq sets launch of HRC futures contract

The Nasdaq Futures Exchange (NFX) is scheduled to launch a hot-rolled coil (HRC) futures contract on Friday December 14, tapping into the United States' steel industry's growing interest in using financial derivatives to manage market risk.

“We are very excited about the launch of the NFX hot-rolled coil futures contract, as market participants on both the physical and financial fronts of the steel industry have shown interest in using this derivative, which is based on a daily index price, to manage price risk,” NFX chief operating officer Steve Sladoje said.

The futures contract is based on the arithmetic average of the daily price assessment published for the given month, pinned to Fastmarkets AMM’s daily US Midwest hot-rolled coil index

Fastmarkets AMM’s daily Midwest HRC index stood at $37.75 per hundredweight ($755 per short ton) on Friday December 7, down slightly from $38 per cwt a day earlier and down 17.6% from a nearly 10-year peak of $45.84 per cwt in early July. But the price was still up 19.2% from $31.66 per cwt at this time last year.

Fastmarkets AMM changed the frequency of its evaluation of the hot-rolled index to daily on November 12 from weekly previously against a backdrop of unprecedented steel market volatility stemming from the US Section 232 tariffs and quotas, possible changes in trade resulting from the US-Mexico-Canada Agreement (USMCA) and potential fallout of a trade war with China.

Daily pricing also is needed because HRC prices are hovering near their highest point since the 2008 financial crisis, and many signs point to continued volatility.

“Having a daily index for the contract is a good idea. When you have a financial contract based on a physical index, it is important to have more price data points than fewer,” Metal Edge Partners CEO Tim Stevenson said.

“To have a contract with a daily settlement in a dynamic market is important. The CME [Group’s] HRC contract settles [against a weekly] assessment which captures 30% of the [spot] market, and as such is not reflective of the market,” Karl Schmidt, a trader at global commodities merchant Hartree Partners LP, said.

But Stevenson noted that his company probably will not trade the contract in the early stages. “The first thing is to make sure our customers are comfortable with the contract and set up to trade it… we will play it by ear to see how it goes,” he said.

“A new contract rarely gets adopted immediately… Industries are often slow in adopting change. Look at oil for example… maybe it is time for a change,” Schmidt said, referring to the steel industry.