***NEW INDEX: MB’s Ferrous Scrap Turkey Index

Metal Bulletin is pleased to announce the launch of its new Ferrous Scrap Index, which has been designed to offer a clear measurement of delivered prices to Turkey.

The Ferrous Scrap Turkey Index utilises a tonnage-weighted calculation of actual transactions which have been normalised to a base chemistry and delivery point, in line with MB’s index methodology.

This methodology allows MB to provide an accurate and unbiased representation of the spot market for ferrous scrap being delivered to Turkey, and includes mechanisms to minimise unfair or unrepresentative market distortion.

In line with other raw materials price movements, the scrap market has seen significant price volatility over the past few years. And, over the past year, steel mill margins have been increasingly left at the mercy of input costs.

As scrap prices have risen more rapidly than finished product prices, many mills have been forced to reduce their production to deal with these increased costs.

The need for price risk management is clear.

A prerequisite for the effective management of risk in the purchasing of raw materials is a robust and transparent representation of the scrap market.

Market participants and risk management providers to the industry have already begun to explore the application of various tools to the ferrous scrap market.

An appetite has therefore arisen for a robust and independent settlement price, which can be used to settle over-the-counter swaps and price risk management tools.

Following the launch of this index, steel mills should soon be able to add these products to their risk management tool box, which already includes tools designed to manage energy price risk and exposure to exchange rate fluctuations.

While not necessarily the largest, the market for ferrous scrap imported into Turkey has long provided a benchmark for the rest of the industry, and many global scrap market participants already use Turkish scrap import price assessments, such as those provided by MB, as a reference.

Turkey’s imports of all types of ferrous scrap were around 15.3 million tones in 2009, down from 17.4 million tonnes in 2008.

The weight of this decline was borne most in the opening months of the year, and closer to the end of 2009 monthly tonnages began to recover towards the peaks seen at the start of 2008, confirming Turkey’s place as the region’s most significant importer of ferrous scrap.

The majority of this material was sourced from the USA, northern Europe, and the Black Sea.

Electric arc furnace crude steel production was somewhere in the region of 17.3 million tonnes in 2009, down from 18.7 million tonnes in 2008, and similar to the levels recorded in 2007.

These same steelmakers are projected to produce more than 5 million tonnes in the first quarter of this year, 49% more than the corresponding period a year earlier.

The importance of this key consumer, and the prices it pays, is clear.

The MB Ferrous Scrap Turkey Index is accurately representative of the spot market, as it takes into account any actual transaction reported in the market, from all countries of origin, and into all ports in Turkey.
It also takes into account any transactions of other scrap grades, which are normalised to the base specification of the Index.

As a result, the Index is calculated using information on the vast majority of the available market.

The Index is tonnage-weighted, and is primarily based on actual transactions, rather than assessments, opinions, bids and offers.

These can be included in the calculation, but will carry less weight than actual transactions according to occasional fluctuations in market tonnages.

The data is normalised using a model that has been developed in-house based on the value-in-use applied by the market to different material grades, to a single major scrap grade (HMS 1&2 80:20), and using the latest freight rates supplied by leading freight brokers to a single port (Iskenderun).

All data points are then averaged on a tonnage-weighted basis, which allows a single representative number to be quoted, based on a statistically robust number of data points.
The normalisation coefficients are updated on a three-monthly basis to reflect underlying changes in the market.

MB has gone to considerable length and engaged in extensive dialogue with market participants to ensure that the index is as accurate and representative as possible. MB has built in unique mechanisms which are designed to prevent market manipulation, either deliberately or inadvertently.

Once all the submitted data has been collated, three sub-indices are created, with data from the major participant groups in the market – suppliers, consumers and traders.

These are individually weighted on transaction tonnage, and then combined with equal weighting to ensure that one side of the market does not swing the index.

This could happen through chance, with different total tonnages being reported by different sides of the market, but its main intention is to prevent cherry-picking — the selective reporting of trades.

In addition, any (normalised) trades that are more than 4% away from the calculated index are excluded as outliers, and the index is recalculated.

This gives a very tight grouping, and any outliers are looked at. Those who appear to be trying to influence the index are contacted and potentially excluded from the price gathering procedure.

The use of a single Index is to maximise the liquidity on a weekly basis. Splitting the market into various grades would deplete the robustness of the statistical model as the number of data points would be too low, and the quoted price would have a less representative movement.

MB does not offer incentives for contributing data, or for using the Index.

MB has gone to extensive lengths to provide an index that is not only acutely reflective of transactions in the physical market, but also a useful settlement tool for both physical and financial transactions.

Prices will be published on a weekly basis.

Cameron Hunt is the director of Metal Bulletin Index and welcomes any questions regarding MB’s latest offering. He can be reached at chunt@metalbulletin.com

Please direct all other enquiries to editorial@metalbulletin.com
Source: London