Continued from Part One.
So if a scrap-based index offers far greater visibility into the EAF market and price dynamics, I asked, are there material differences between TSI’s scrap index and other providers? I fully expected to hear “no, we are all tracking the same numbers.
But apparently, not all indexes are equal.
The traditional approach of an analyst getting on the phone and calling a few scrap processors or consumers may have worked in the past, but for the swaps market, participants want to see the index prices within a few dollars — if not a few cents — of the prices they are trading at each day. TSI claims their index is based on many more price inputs than others in the market, undergoes a more rigorous algorithmic process and reacts faster both on the way up and the way down as the price moves, more accurately reflecting what is happening in the scrap market.
The report is not solely aimed at steel producers or consumers, but as Clark explained to us previously, also at the critically important financial institutions that provide some of the much-needed liquidity in the market, both by providing hedging solutions to their clients and also by facilitating speculator involvement taking the other side of the industry trades.
So has the swaps market gotten off to a flying start? First trades only stared in April, but Mehew believes FIS will be up to 200,000 tons per month before year-end. Typical deal sizes are 1,000 to 25,000 tons and although early 5,000 10,000 ton trades were for the prompt to 3-month time frame, the market is already developing out to Q3 and Q4 with some trades already into 2012. Early activity was from trading houses, but as Mlodziejewski pointed out, steel mills in Greece and Turkey have now become active in the market with strong interest being shown by US East Coast scrap processors, which is the source of between 30 and 40 percent of Turkish scrap imports.
Some US traders have proved so keen that they have traveled across the pond to see how the market works and develop the broker relationships. With a time lag of something like 2-3 months between first cold phone call and first live trade, there is clearly a significant gestation period as firms go through education, due diligence and evaluation before stepping into the market.
But FIS sees that as an integral part of its role in developing a new market like this. Early adopters need a considerable amount of education, yet gain for themselves a clearly demonstrable competitive advantage if they are willing to make the effort.
Copies of the report are available from The Steel Index at the following link here or by contacting Virginia Mainwaring of TSI at firstname.lastname@example.org.