Cargill // Steel Swaps
Transcript of Cargill // Steel Swaps
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Derivatives and Risk
M n emen ser ers ec i e
Athens, Greece
CONFIDENTIAL. This document contains trade secret information. Disclosure, use or reproduction outside Cargill and inside Cargill, to or by those employees who do not havea need to know is prohibited except as authorized by Cargill In writing. (Copyright Cargill, Incorporated 2007. All rights reserved.)
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The reality for the steel industry however is that change is coming
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A Few Myths About Derivatives
Hedging and risk mitigation, when correctly done, is a valuable tool andreduce the market risk, i.e. allows to lock in margin
Derivatives are onl dan erous for those without h sical market knowled eand trading/risk management strategy
Derivatives are only for speculators
. . . ,derivatives to hedge risk
Yes speculators can participate but they bring liquidity and take risk
n exes are naccura e Indexes are only as good as the data collected
From our experience, the CRU HRC pricing reflect the physical spot marketuite well
Paper markets cause additional volatility
Steel, Iron ore and Scrap, which historically have had no paper markets,
Industries with paper can actually be less volatile
It is im ortant to understand the h sical market fundamentals behind
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derivatives, and then how to apply derivatives to manage risk
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Who are the main players in a steel Derivative market?
Role and BenefitRole: Bring together buyerand seller for financialli uidit of roduct HRC
Role and BenefitRole: Provide Physicaldelivery of product HRC.
Financial
Companies
Banks
Financial
Companies
Banks
Steel
Producers
SteelMills
Steel
Producers
SteelMills
Benefit: Additional service
they can offer their clients.
Benefit: Ability to hedge andlock in margin on fixed price
contracts. (ex. Sell paper
ro ers ro ers ra ngcompanies
ra ngcompanies
delivery physical on CRU
floating price)
HedgeFunds
Privatemoney
PensionFunds
HedgeFunds
Privatemoney
PensionFunds
SteelConsumers
OEMs
SteelConsumers
OEMs
Role and BenefitRole: Provide financialliquidity of product HRC
Role and BenefitRole: Provide physicalliquidity of product HRC
erv ce enters
Construction
erv ce enters
ConstructionBenefit: Additional marketoutlet to invest capital for
investors to express their
Benefit: Ability to hedge andlock in fixed prices for
extended period of time. (ex.
take delivery on floating priceCRU.
All 4 sectors must play an active role for the derivative market to develop
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and provide the necessary liquidity for a healthy and active exchange butthe industry (steel producers and users) must want the tool
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How to use financial tools
1. Lockinprofits
nanc a oo sa ow econsumer o oc n e r u urecos o s eeensuringthemthatwhentheproducetheirproduct612monthslaterthey
willknow
their
cost
ensuring
amargin
2. Managepricerisk
Becauseoftheincreaseinsteelpricevolatilitycompanieswhomusthold23monthsofinventoryareexposedtosignificantlossesinarapidlyfalling
market.Theproperuseofriskmanagementproductswouldallowthese
consumerstheabilitytoderisktheirexposuretoheavylossesbyentering
nto uturessa escontracts
Financial tools when used correctly and in conjunction with physical deliverycan provide increased opportunities to reduce risk and lock in profits
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ReduceRisk Hedging
So your over all profit is fixed
Time
Hedging is removing exposure or risk by offsetting it with something of
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the opposite risk
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IronOre,SteelandFreightDerivatives
Example:Iron
Ore
TSI
index
and
SGX
forward
prices
th
duringthesummertheIronOremarket
correctedinAugandhasfoundanewfloor
inthe
last
few
days
and
current
price
is
Backwardation (futurepricelowerthan
current):
March11
traded
today
(Sept
21th 10)
at
140.00 124.00
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Example:IronOreTSIindexandSGXforwardprices
IronOre,SteelandFreightDerivatives
Case 1: From current 140 prices fall.At maturity (Mar 2011) the TSI price is 90
Case 2: From current 140 prices rally.At maturity (Mar 2011) the TSI price is 170
140
170
90
140
For paper settlement , on end Mar 2011, the buyergivesthe seller the difference ie 124 -90 = 34
usd/mt
For paper settlement, on end Mar 2011, the buyerreceivesfrom the seller the difference ie 170-124
= 46 usd/mt
Physical effective sales/buy price: 90Paper transaction : 34Total transaction price: 124
Physical effective sales/buy price: 170Paper transaction: -46Total transaction price: 124
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On21.09.10,theMar2011IronOrepricehasbeenfixedto124,withthepapertransactionsgains/losses
offsettingany
losses/gains
on
the
physical
market.
Thepriceriskhasbeenhedged
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Spot Price and Indices Comparison
The Iron Ore spot price has remained quite volatile over the past 1 year
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HotRolledCoil,PigIronandScrapPrices1200.00
1000.00
800.00
400.00
600.00
200.00
.
0.00
ary
0
5
ch
05
ay
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Janu
Ma J
Septem
Novem
Janu
Ma J
Septem
Novem
Janu
Ma J
Septem
Novem
Janu
Ma J
Septem
Novem
Janu
Ma J
Septem
Novem
Janu
Ma J
CRU(nt) AMMBushling(Chicago) RyanNotes"Mean"
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e past 5 years ave emonstrate stee an raw mater a pr ce vo at ty an
we expect this trend will continue into the future
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Derivative Volume Evolution60,000
70,000
200,000
250,000Nymex Volumes and Open InterestOI (MT) Volumes(MT)
3,500,000
30,000
40,000
,
100,000
150,000
1,500,000
2,000,000
2,500,000 IronOre
Swap
Volumes
0
10,000
20,000
0
50,000
0
500,000
1,000,000
LME Med Volumes and Open InterestOI (MT) Volumes(MT)Volumes Open Interst (MT)
SGXVolume(mt) LCHVolume(mt) TotalVolume(mt)
4000000
5000000
6000000
1200000
1400000
16000001800000
ton)
ton)
e ars
80,000
100,000
,
150 000
200,000
,
1000000
2000000
3000000
200000
400000
600000
800000
lots
(x1
lots
(x1
40,000
60,000
50 000
100,000
Volume Open Int
0
,
0
28.04.2008 28.04.2009 28.04.2010
Derivative markets are picking up in both volume and participants as pricevolatility continues to impact results and expectations in the Ferrous Industry
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Issues to watch going forward
LMEBilletwarehouse
LMEhasopenedaNorthAmericaBilletwarehousethatwillallowatrueglobaldeliveryforitsbilletcontract
ScrapExchange
Anumberofindexesarelookingtolaunchascrapexchange
MoreandMorecounterpartiesarecomingintotheFerrouser va vemar e s
Automotive,Energy,Servicecenters,Appliance,Heavyequipment
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change but rather work with Cargill to help see how change can enhance yourbusiness
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ThankYou
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