World-first ferrous scrap swap cleared at LCH.Clearnet

United Kingdom – LCH.Clearnet made history on April 6 in processing the world’s first-ever cleared swap transaction for ferrous scrap.

The cash-settled contract uses The Steel Index (TSI) HMS I/II 80/20 price for scrap imported into Turkey as its settlement index and was cleared through the LCH.Clearnet platform. LCH’s clearing services enable the industrial and financial communities to mitigate bilateral counter-party credit risk when trading over-the-counter financial products.

The first trade, for 50 lots, was made between two trading houses and brokered by Freight Investor Services (FIS) for settlement in the month of May; each lot for the contract is 20 tonnes. The forward curve for ferrous scrap, delivered Turkish port, is currently in backwardation (forward prices are at lower levels than today’s prices) and a price of US$ 422 per tonne cfr Iskenderun port was locked in.

Tim Hard, TSI’s Director of Steel and Scrap, says: ‘This is an important moment for the scrap and steel industries. Scrap forms the bulk of input costs for electric arc furnace-based steel producers and sees notorious price volatility. A tool which can lower the costs of borrowing for scrap producers and processors, and provide price certainty for EAF producers, should be welcomed. This has positive implications for the scrap, billet and rebar markets.’

Arthur Worsley, Scrap Derivatives Broker at FIS, comments: ‘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.’

Sam Mehew, Steel Derivatives Broker at FIS, adds: ‘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-run, fixed-price steel contracts become increasingly unworkable, cash-settled swaps contracts promise to allow a more transparent and cheaper method of securing long-term flexible pricing for the industry.’