The CME Group launched its scrap steel futures Monday, Sept. 10, and last week saw the first trades in its hot-rolled coil steel options, which were launched in December.
Following up on the interview we conducted on the scrap contract with the CME’s Harriet Hunnable last month, JLN Metals editor Sarah Rudolph spoke with Young-Jin Chang about both of these new products and how they can be used together and as parts of the CME Group’s Virtual Steel Mill.
Q: This is the first time the hot-rolled steel options have traded, but they were actually launched several months ago. Why do you believe you are seeing interest in the contracts now?
A: It is typical after we launch a new product for it to take some time before we see trading, mainly because it takes some educational effort for people to understand what the product is about and get up to speed. We finally saw that happening in August. It’s a combination of the market and where the price is trending. When the market is less volatile, maintaining the status quo, you see less trading activity, especially in options.
Q: How many of the options contracts were traded?
A: There were 1,000 contracts traded Aug. 31. We are very excited by that. That is a very solid number for a first trade.
Q: The CME scrap steel futures launched Monday. Can the two contracts be used in concert? How will they complement each other?
A: They complement each other very well. About 60 to 65 percent of the steel produced in the U.S. is based on scrap metal, through EAFs (Electric Arc Furnaces). Considering that, scrap can account for as much as 85 percent of the raw material cost of steel. It is the main raw material for a lot of steel manufactured in the U.S. and the most volatile component of steel.
The hot-rolled coil options fit well with what we already have so far in our Virtual Steel Mill. We’re the only exchange that offers a variety of ferrous products from coking coal to scrap to iron ore to hot-rolled coil that is really targeted for a global audience, not just the Midwest.
The products in the CME’s Virtual Steel Mill help people to fix their raw material costs. There is a strong relationship between the scrap and the hot-rolled coil, so participants can do a spread between those two products to help manage their risk.
The major movement in the hot-rolled coil contracts came from service centers. These centers also generate the scrap we are launching. This ties into the Virtual Steel Mill concept.
Q: What type of users do you expected to trade these products?
A: The products in the Virtual Steel Mill address the entire chain of production, from scrap processors, to steel producers, to steel service centers, to end users (manufacturers). They are designed to help the industry manage risk from raw material all the way through finished product.
The hot-rolled coil options were the natural next step from the hot-rolled coil futures. And then it made sense to introduce scrap as the next component.
Q: What factors are currently driving demand for hot-rolled steel and scrap steel?
A: More than anything it is price volatility. Volatility in prices is here to stay, and businesses have started to seek stability in the marketplace.
Q: Steel derivatives are relatively new: both the CME and LME started trading them in 2008, I believe. Why did they take longer to come to market than, say, copper derivatives?
A: I think they are on par with how other metals and energy products have developed. There is a big learning curve with something this new to the market.
When China came into the market in 2004, volatility came more into play as they needed a lot of raw materials to build their infrastructure. Then the financial crisis in 2008 added to the volatility, and the industry needed to manage those volatility concerns.