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Scrap price volatility triggers new interest in Futures
Apr 1,2015 17:03CST
industry news
Prices for steel scrap imports into Turkey have dropped around US$80/tonne (25%) since the turn of this year alone.


TURKEY April 01 2015 1:10 PM
ANKARA (Scrap Register): Prices for steel scrap imports into Turkey have dropped around US$80/tonne (25%) since the turn of this year alone. This has provided another reminder, if it were needed, of the challenges facing scrap suppliers, traders and steel mills, said The Steel Index.
The root cause of this fall can arguably be traced back to slowing growth in Chinese steel demand and production, coupled with increasing iron ore supply, depressing iron ore prices. With significantly lower raw material input costs, Chinese steel exports (produced predominantly via the blast furnace/ basic oxygen furnace route which converts iron ore into steel) have slowly but surely been influencing the traditional export markets of Turkish steel producers. In turn, this has put pressure on their raw material costs – which are predominantly scrap, given around 70% of steel production in Turkey is via Electric Arc Furnaces – as they battle to maintain market share and remain competitive. 
On the assumption the price of the two steel-making ingredients is intrinsically linked, TSI Benchmark Scrap Price for Turkish Scrap Imports and the Scrap-Iron Ore Price Ratio below shows that the scrap-iron ore ratio has hinted at either scrap being overpriced or iron ore being under-priced during the past 12 months relative to historic norms. With iron ore mining capacity continuing to increase and little sign of a return to strong growth in the Chinese steel market, the implication would seem to be that scrap prices could drop further.
The traditional link between scrap and iron ore prices is beginning to be questioned, however, with a number of market participants suggesting the two may have disconnected. If true, this brings even more uncertainty into scrap pricing, with iron ore price movements no longer providing a directional guide. 
The last few months have provided a timely reminder of the need for scrap price risk management tools. Swings of around US$100/tonne in the ferrous scrap price in the space of a few weeks have inevitably created huge challenges for participants throughout the scrap-steel supply chain, with margins adversely affected. As those who have been around the industry for more than a year or so will quickly tell you, this recent level of volatility is certainly not unusual in the Turkish scrap market – prices have moved by at least US$100/tonne between their annual peak and trough in four of the past five years. 
Price risk management tools allow companies to effectively lock in a sales price or raw material cost over the life span of a project or budget period, giving them the confidence to make important investment or other business decisions going forward without the fear of margin erosion. They also offer producers, consumers and investors the opportunity to diversify their portfolios. 
With this in mind, a couple of major exchanges have announced plans to launch new scrap futures contracts in the coming months. On April 2, 2015, Borsa Istanbul will be launching a steel scrap futures contract, cash-settled using the average of The Steel Index’s daily benchmark price for Turkish scrap imports of HMS #1&2 80:20 CFR Iskenderun port in the expiring month. The contract will be quoted and settled in US Dollars with a lot size of 10 metric tonnes. Takasbank will serve as the central counterparty for the contract. 
The London Metal Exchange has also announced plans to launch a cash-settled ferrous scrap contract in October this year. This will go hand-in-hand with a rebar contract, allowing market participants to lock-in both raw material and finished steel prices.
turkish steel scrap imports

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