Professional Documents
Culture Documents
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A Quick Word About FIS
Over 10 years, we have aimed to become the foremost provider of liquidity and
facilitator of risk management products in five specialist commodity markets.
Today, FIS serves the needs of over 230 clients on a daily basis. We are the
leading derivatives brokerage by market share within each of our core markets.
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Agenda
2. A Common Problem
3. What is a Swap?
5. Summing Up
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Worldwide Scrap Metal
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Scrap Metal in Steel Production
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Worldwide Scrap Metal
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The Steel Index CFR Turkish Scrap
http://www.thesteelindex.com/en/scrapprices/
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TSI Correlations
Chinese and Subcontinent Dry Bulk Ship Scrapping Prices > 91.20%
Chinese and Subcontinent Dirty and Clean Tanker Ship Scrapping Prices > 87.97%
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Agenda
2. A Common Problem
3. What is a Swap?
5. Summing Up
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The Scenario
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The Problem
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Two Possible Solutions
(2) Use scrap swaps to hedge the price exposure up to 24 months in advance
and enter the spot market at its own convenience to purchase the scrap
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Agenda
2. A Common Problem
3. What is a Swap?
5. Summing Up
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What is a swap?
A swap is
…a contractual agreement…
…brokered between ‘two counterparties’…
…to settle the difference in cash between…
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What is a Swap?
For Example
1. It is June 2011 and the spot price of scrap (according to ‘The TSI CFR Turkish
Scrap Index’) is $444 per metric ton.
2. I think the price of scrap is going up and will average higher than $460 in 2012.
3. My counterparty disagrees and thinks the price will be lower than $460 in 2012.
4. Since we are both confident in our views we agree that we will review the
actual index average again at the end of 2012.
5. We agree a swap contract for 2012 with a strike price of $460
• So, for every US$ that the average index price for 2012 is higher than $460 my counterparty
pays me $1. Conversely, for every $1 it is less than $460 I pay my counterparty $1.
6. On Jan 1st 2013 we average the weekly values for 2012 and find that the actual
average for the year was $450.
7. I pay $450 - $460 = $10 to my counterparty .
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What is a Swap?
In Reality
• Counterparties are scrap traders, steel mills, service centres, end users,
investment banks and hedge funds of various sizes.
• Individual trades are usually for multiples of 5,000 tons per month ( 5,000
tons >> $1 change in price = $5,000 exchanged)
• Trades are anonymously matched/facilitated through brokers (like FIS)
• A clearing house and its members stand between the financial transactions
of the two counterparties and act as insurance against counterparty default.
• I.e. even if one counterparty goes bankrupt the second may still confidently retrieve its
earnings from its clearing member or the clearing house.
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The Mechanics of Swaps Trading
3 3
Clearing Member Clearing House Clearing Member
(Back Office) (LCH.Clearnet) (Back Office)
CLEARING
4 4
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Combining Natural Exposure with Swaps
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Agenda
2. A Common Problem
3. What is a Swap?
5. Summing Up
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The Problem
Confused? No Problem! Call us on +44 20 7090 1126 or email us at steel@feightinvestor.com and we’ll walk you through it
• They are
1) Worried that scrap metal prices might increase, eliminating the margin
between their volatile costs and the fixed revenue from the billet.
2) At risk of losing money on their transaction or being forced to default on
their important client if the market turns significantly against them.
3) Unable to effectively allocate/invest working capital since they cannot
accurately forecast profit margins and must keep a large cash reserve.
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The Solution
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• The Mill contacts FIS and places a ‘buy’ order for 13,800 lots of LCH cleared swaps for
the Cal 12 period (20mt per lot x 13,800 lots = 276,000 mt).
• A broker at FIS negotiates a firm strike price with a ‘seller’ in the market at $376 per
metric ton for settlement against TSI’s CFR Turkish Scrap Index.
• The trade is agreed and confirmed and FIS and the Mill report the trade to LCH.
• The Mill has successfully hedged its net cost for the exposed volume of exposed scrap at
$376 per metric ton regardless of the actual price of the spot market in Q4.
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The Result
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At the end of 2013 the settlement price on TSI Turkish Scrap is calculated at $440 per metric ton
• The profit from the Mill’s swaps position is equal and opposite
+ $64
to the increase in the physical cost.
$376 Swap • As such, the net cost of scrap metal for the period of Cal 12 is
Profit & Loss
P&L
fixed at the strike price of the swap.
$440
• The Mill has found a way to fix the net price per ton of scrap
Average $/MT
TSI Turk Scrap metal
• 18 months in advance
Physical Position 23,000 tons x $440 x 12 months = - $121,440,000 • Without having to periodically enter the scrap market
for large volumes of scrap
Swap Position ( $440 - $376 ) x 23,000 x 12 = $17,664,000
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The Result
fixed margin
• Regardless of spot price, the Mill was able to enter the spot market at its convenience and on a regular basis for small
tonnages reducing its overall costs of carry.
• Where each of its competitors was forced to default on their long-term off-take agreements or sink significant
quantities of cash maintaining the unprofitable agreement, this mill was comfortably able to honour its commitment to
its customer.
• The customer is delighted with the service provided by the Mill and decides to double its off-take order for 2013.
• Since the Mill had secured the profit it would receive in advance, it has been able to confidently allocate capital for a
second site to accommodate it’s new requirements.
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Advantages Summary
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Agenda
2. A Common Problem
3. What is a Swap?
5. Available Products
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Turkey Scrap / The Steel Index / LCH.Clearnet
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
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S Europe HRC / The Steel Index / LCH.Clearnet
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
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N Europe HRC / The Steel Index / LCH.Clearnet
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
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China Rebar / Cleartrade Steel / LCH.Clearnet
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
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China HRC / Cleartrade Steel / LCH.Clearnet
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
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USA HRC / CRU / CME Clearport
product index clearing house
Interested in this swap? Require more information? Get our free reports at http://bit.ly/steel-reports or call us on +44 20 7090 1126
swap specifications
index specifications
index CRU
grade For commercial quality
gauge / width Extras excluded
coil weight > 40,000lbs
material surcharges (e.g. scrap surcharge) Included
extras (e.g. non-standard dimensions) Excluded
price point Net effective base price, ex-mill
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Agenda
2. A Common Problem
3. What is a Swap?
5. Summing Up
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In Summary
Freight Investor Services – The world leading broker of steel and iron ore
swaps and pioneer of cash settled swaps contracts
FIS Reports – A quick and free way to keep up with daily spot (index) and
forward (swaps) pricing for a wide range of steel products
• Get them free at http://bit.ly/steel-reports
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Thank you, Next Steps and Q&A
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