SIAM…Supply Market Dynamics
Strategies for Dealing with the
New Steel Supply Chain
SIAM
3rd Biennial Complexity Symposium
University of Michigan--Dearborn
Platts Steel Markets Daily
Joe Innace, US Managing Editor
October 10, 2008
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Global steel dynamics…
Some background:
The steel industry has been transformed in recent years and the
massive expansion of the Chinese economy has helped drive a
huge increase in steel consumption and production, which has
pushed prices to record highs.
Large segments of the industry were privatized only relatively
recently, and the global steel industry is now maturing along the
same lines as aluminum and oil.
Consolidation has created a new landscape, and a group of high
profile, profit-driven steel producers.
Steel market is huge: 3rd largest after crude oil and natural gas
The Platts mission: Bring clarity and independence to steel price
discovery.
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A more volatile market…
• Explosive market growth in
an $800 billion industry
• Steel is a 1.2 billion tonne
market (up 50% since 1999)
and 400 million mt traded
globally each year
• Consumers are searching
for ways to manage steel
price volatility.
• Traditionally HRC hovered
around $200-300/mt but peaked
at over $1,150 in July 2008
2
• Steel demand and prices
move over a business
cyclical but many of the
uses of steel are seasonal
(construction)
• Manufacturers of steel
goods are suffering from
low-priced imports - ‘Made in
China Syndrome.’
• No way to manage raw
material costs leading to
‘Cost/Price Squeeze’
North American consolidation…
N. American sheet market: Estimated annual spot/contract tonnage
million short tons
Company
Estimated spot st/year
Estimated contract st/year
Total
Arcelor Mittal (including Dofasco)
7
13
20
US Steel (including Stelco)
11
9
20
Nucor*
6
6
12
United States
2008
Source: Platts Steel Markets Daily
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North American consolidation…
N. American sheet market: Estimated annual spot/contract tonnage
million short tons
Estimated spot st/year
Estimated contract st/year
Total
Severstal NA (Rouge) and SeverCorr
(including Sparrows Point)
3.5
3.5
7
AK Steel
2.5
3.5
6
Steel Dynamics*
2
1
3
Wheeling-Pittsburgh (Esmark)
(Severstal acquiring)
2
0.5
2.5
Company
United States
2008
Source: Platts Steel Markets Daily
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North American consolidation…
N. American sheet market: Estimated annual spot/contract tonnage
million short tons
Company
Estimated spot st/year
Estimated contract st/year
Total
Delta
1.7
0
1.7
WCI Steel (being acquired by Severstal)
0.5
1
1.5
Gallatin
1.4
0
1.4
Duferco-Farrell
1
0
1
Beta Steel
1
0
1
39.6
37.5
77.1
1.8
0.2
2
United States
Subtotal US
Canada
Algoma (Essar)
North American total
Source: Platts Steel Markets Daily
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79.1
From price stability to volatility…
% change in U.S. HRC price month on month
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
1974
1980
Source: Platts Steel Markets Daily and WSD
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1986
1992
1998
2004
2008
An exposed supply chain …
Mills
Exposed
Prices are moved by trade flows
outside mill control
Traders
Exposed
Contracts are
cancelled when
prices move unexpectedly
Service centers
Exposed
End-users
Exposed
Customers
increasingly look to imports
for better deal
Consumers
Forced into ‘spot’ market
as contracts revised
Financial Community
Own shares in mills
and distributors
M&A activity
OTC products
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Benefits of risk management …
The value of price transparency
• Transparency builds Trust
• Consumers know prevailing price levels, allowing both parties to
focus attention on strategic issues- job completion, new product
development, long term planning, etc.
• Transparency sustains Dialogue between buyer and seller
• Potential customers are going to shop around anyway
•Transparency benefits Price Discovery
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Benefits of risk management …
The value of forward prices and financial
contracts
• Offset price risks …mitigate risk of price volatility
• Protect operating margins
• Stabilize long-term financials
– Locks in future cash flow
– Reduces cost of capital (Improved credit ratings)
• The ability to manage short-term/seasonal price
fluctuations can make long-term contracts more stable
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Managing risk …. Automotive
A parts stamper is bidding on new business to supply an
automotive customer
The customer—maybe a carmaker, perhaps a bigger
manufacturer—is negotiating with parts stampers to
supply it with a vehicle body component.
The customer, in effect, is outsourcing its steel supply to
the parts stamper. The parts stamper plans on sourcing
steel directly from steel mills, but at this point in its bidding
process for the business is unable to secure a fixed price
quote for steel.
This leaves the parts stamper exposed to significant price
risk.
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Managing risk … Automotive
Options:
This limits the stamper’s options:
•Quote a fixed price without a fixed supply agreement
from the mill, with high contingency costs for unknowns
•Attempt to postpone the bid until a future date
•Not bid for the new business
Each of these options adds risk for the stamper
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Managing risks … Automotive
Solution:
A financial market provides the tools for the stamper to
fix the forward price that he cannot find in the physical
market, allowing the stamper to “lock-in” an advantageous
price, for the duration of the contract.
Execution:
• Futures Contract: Take a forward position via an
Exchange. Contract can be cash settled if held to expiry
OR a physical-traded contract can be warehoused
until needed
• Swaps: Over-the-counter contracts typically involving a
broker and a major bank
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Managing risks … Automotive
PHYSICAL
Dec ‘08 – Bid allows for 5,000 tons
of steel sheet @ $800
* WINS CONTRACT*
Feb ‘09 – Negotiates steel supply of
5,000 tons with
preferred steel supplier
Jun ‘09 – Takes delivery of 5,000 tons
of sheet at the market price of
$900 in order to make the
component.
Net Position:
$4,000,000 - $4,500,000 = minus $500,000
($100 / ton)
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FINANCIAL
Dec 08 – Buys financial contract
for 5,000 tons of sheet
for June ‘09 @ $800
Jun ‘09 – Exercises option to
sell financial contract for
5,000 tons at the then
market price of $900
Net Position:
$ 4,500,000 - $4,000,000 =
Plus $500,000
A Steel Price Benchmark Will . . .
NOT attempt to capture the price of every grade/size of steel
NOT oblige mills to produce only one grade of steel
NOT attempt to capture the price of steel in every location
NOT remove the need to establish long-term business
relationships between buyers and sellers
NOT remove price volatility, but will provide both buyers
and sellers tools to MANAGE price volatility
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Progress of Steel ‘Futures’ …
DUBAI GOLD AND COMMODITIES EXCHANGE (DGCX)
Rebar futures contract started trading in October 2007 to tap a 12 million mt regional
market. Volumes began to exceed 500 lots per day within the first two-to-three months,
but the contract could not maintain liquidity and has been struggling to attract
investors. Zero trades in recent months. The Dubai contract is for both cash settlement
and physical delivery in Dubai.
15
Progress of Steel ‘Futures’ …
LONDON METAL EXCHANGE (LME)
The London Metal Exchange launched a steel billet futures contract in
April 2008. Cash trading commenced in July for physical delivery in the
Middle East and Asia. Thirty million mt of billet traded annually. LME has
traded over 500,000 mt since launch and counts 21 members trading steel
billet. Turnover in excess of $500 million. Price peaked at $1,250/mt in
June and has declined since and is now below $1,000.
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Progress of Steel ‘Futures’ …
CHICAGO/NEW YORK MERCANTILE EXCHANGE (CME/NYMEX)
CME Group will launch HRC futures contract in October 2008, planned for more than two
years prior to CME & NYMEX merger. Trading and clearing on CME Globex and ClearPort
in the form of futures swaps or physical trade. Each contract will be listed for 18 months.
US Midwest contract will be financially settled against a Daily Price Index provided by an
independent, third-party.
SHANGHAI FUTURES EXCHANGE (SHFE)
The Shanghai Futures Exchange has been trying to launch rebar and wire rod futures
contract since 2006, but the exchange still awaits support from China's steel industry
and the central government. The recent iron ore and steel price shocks in China have
given urgency to the issue. The Exchange has not yet given a date for launching its
contracts but the industry thinks it might be soon since the scheme has been approved
by China’s Securities Regulatory Commission.
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A glimpse of the future…
Risk management tools will help both
buyers and sellers, but…
…Before the steel industry can enjoy
the benefits of risk management tools
there is a need for accurate, robust
and independent prices.
ENTER…………………………….
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Introducing Platts Steel Markets Daily
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The Platts difference …
Daily steel price assessments:
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–
Refer to specific grades: HRC, CRC, Plate, Rebar (ASTM)
–
Refer to exact specifications: Chemistry, Weight, Dimensions
–
Refer to specific locations and INCO terms: CIF Antwerp, EXW Ruhr,
FOB Black Sea, CIF Houston, EXW Indiana
–
Refer to a spot-market order quantity: 1,000-2,000-5,000mt
–
Capture actual verifiable transactions every day
–
Transaction prices normalized to Platts assessment guidelines
–
Rigid compliance regimen updated 2X a year . . . .
Methodology Guide
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Methodology and specs…hot-rolled coil
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Europe HRC
• Ex-works Ruhr
• FOB Black Sea
• CIF Antwerp
North America HRC
Specification
• EN 10025
• Structural grade
Specification
- ASTM A 1011
- Commercial Type B/C
Dimensions
• Thickness 3-15mm
• Width 1200-1500
Dimensions
• Thickness-.083-0.625
inches
• Width 48-60 inches
• Ex-works Indiana
• CIF Gulf Coast
Methodology and specs…rebar
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Europe
• Ex-works NWE
• FOB East Mediterranean, basis
Turkey
North America
• Ex-works US Southeast States
• CIF Houston
Specification
• B500B/C
Specification
• ASTM 615
• A60
Dimensions
• 16-20mm diameter
• 12m length
Dimensions
• #7-#11 (22mm-36mm)
• 20ft-40ft
Panama Canal Authority selects Platts…
$3.35 Billion Infrastructure Project
Panama Canal Authority selects Platts Steel Markets Daily as reference
price for a high-profile RFP. This was a high-visibility breakthrough for
Platts involving construction of the Panama Canal's third set of locks.
The following is excerpted from the Panama Canal Authority's Particular
Conditions addendum:
The Employer shall determine reference prices for the aforementioned materials and/or products by
averaging the prices quoted over a 180-day continuous period immediately prior to the Base Date, by:
(a) Platts Steel Markets Daily, Reinforcing Bar, Ex-Works US SE, Close/Midpoint Price in US $ per short
ton for Reinforcing Steel,
(b) Platts Steel Markets Daily, Plate, "Ex-Works, US SE, Close/Midpoint Price in US $ per short ton for
Lock Gate and Bulkhead Structural Steel Plate Shapes…
(d) Platts Latin American Wire, Gulf Diesel (No. 2 Oil), Closing Price, in US $ per US gallon for Diesel
Fuel.
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Existing Panama Canal Locks …
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New Pacific Locks …South of Miraflores
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New Atlantic Locks…East of Gatun Lake
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The Platts difference …
Hot-rolled coil composite spot price at about $895/mt
$/mt
1150
1050
950
850
Source: Platts Steel Markets Daily average of all
daily-assessed regions
750
650
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10/1/08
9/1/08
8/1/08
7/1/08
6/1/08
5/1/08
4/1/08
3/1/08
2/1/08
1/1/08
12/1/07
11/1/07
10/1/07
9/1/07
8/1/07
7/1/07
6/1/07
5/1/07
4/1/07
3/1/07
2/1/07
1/1/07
550
Thank you . . .
Joe Innace
US Managing Editor
Platts Steel Markets Daily
joseph_innace@platts.com
212.904.3484 direct
212.904.2437 fax
The McGraw-Hill Companies
Two Penn Plaza
New York, New York 10121
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