Swap contracts are used to manage the risk of a price-volatile market, such as the scrap industry. It takes the form of a cash-settled agreement brokered between two counterparties to settle the difference in price between the price agreed ‘today’ (for the product produced and delivered in a given area, at or over a specified period in the future) and the actual steel price as measured by an index.
The first trade was cleared by independent clearing house group LCH Clearnet. It was concluded for the May period for $422 (£258) per tonne between Cargill International and The Steel Index’s Turkish CFR Scrap Steel Index.
FIS steel derivative broker Sam Mehew said: “With increasing volatility in scrap prices we have seen growing demand for a swaps contract that can mitigate risks faced by the steel industry. As long term fixed price steel contracts become increasingly unmanageable, cash settled swaps contracts allow a more transparent and cheaper method of securing long-term flexible pricing for the industry.”
FIS has seen support from mills, traders and producers wanting to manage price risk.
FIS steel derivatives broker Arthur Worsley added: “With more trades in the pipeline we expect the first participation from a steel mill to come very soon and liquidity to increase at a healthy rate. It is refreshing to see the growth and support for the market come from its end users; this scrap product is long overdue and will bring real value to the operations of collectors and mills alike.”