Cleartrade Exchange Pte Ltd., the OTC electronic global marketplace for freight and commodity derivatives has announced the launch of four daily Cleartrade Exchange China Steel Indices. Steel was the second largest commodity market in 2010 and is a key component of the world economy; as China is the largest steel-producing country, steel is crucial to its continuing growth. The only commodity more closely aligned to GDP growth is oil.
Cleartrade Exchange will support the development of a swaps ferrous metals complex product portfolio by providing a trade execution venue, cleared contracts and the supporting STP (straight-through processing) infrastructure. There is great demand from traders for cash-settled swaps as a means of managing price risk and exploiting new market opportunities.
The Cleartrade Exchange China Steel Indices are: China Domestic Hot Rolled Coils (HRCs), China Domestic Hot-rolled Ribbed Bar (Rebar), China Domestic High Speed Wire Rod and China Domestic Medium Plate. The indices are based on data relating to spot market transactions, provided by steel industry participants who have built up a long working relationship with Umetal, a partner of Cleartrade Exchange. The industry participants represent the entire Chinese domestic steel industry, and include producers, traders, end users and stockists. The calculation methodology gives an accurate reflection of China’s domestic steel spot market prices and is consistent with methodologies used by other established indices. To ensure the consolidated prices are an accurate representation of steel prices across different regions in China the prices are sourced from 25 of the largest cities trading steel products domestically.
Richard Baker, CEO of Cleartrade Exchange, said, “There is a clear need for improved hedging and risk management. The Cleartrade Exchange Steel Indices address that need. The indices are an excellent barometer of China’s domestic steel market as they are assessed in the local currency and then converted into a dollar value. In publishing these indices Cleartrade Exchange hopes to capture growth in the liquidity of steel futures, which can be combined with trading iron ore swaps and FFAs.” He added:”The products will be launched alongside iron ore and freight on the Cleartrade Exchange platform, with coking coal to follow. This will allow participants to trade as a complete virtual steel mill and manage and hedge the relevant elements of production.”
The steel industry is highly fragmented with a multitude of different products. However, most of the steel market falls into two categories: flat products, used in the automobile, shipping and white goods industries and long products, which are mainly used in construction. The two steel products most widely used as the underlying market for derivatives are Hot Rolled Coil (flat product) and Reinforced Bar (long product).
Steel: background
In the recent months steel prices have been highly volatile, with Chinese Rebar prices jumping by 34% between July 2010 and February 2011, peaking at $757/t. China produced over 130 million tonnes of Rebar in 2010. The rise in prices was due to several factors: greater demand from China; increased demand from the other major steel markets, driven by improvement in the global economy; higher input prices, with iron ore reaching a high of over $190/t this year and coking coal topping $300/t; and low steel stockpiles.
Steel: key facts*
- World crude steel production reached 1,414 million metric tons (mmt) in 2010, an increase of 15% compared to 2009 and a new record for global crude steel production.
- All the major steel-producing countries and regions showed double-digit growth in 2010. The EU and North America had higher growth rates due to the lower base effect from 2009 while Asia and the CIS recorded relatively lower growth.
- In December 2010, world crude steel production for the 66 countries reporting to the World Steel Association (worldsteel) was 116.2 mmt, an increase of 7.8% compared to December 2009.
- China's crude steel production in 2010 reached 626.7 mmt, an increase of 9.3% on 2009.
- Currently there are approximately 8 exchanges listing steel derivatives for trading.
The methodology**
- The Indices are published daily, at 4.30pm China (Shanghai) time.
- Currency conversion from CNY to USD is done using Bloomberg currency fixing rates.
- These products will be cash settled and cleared with London Clearing House (LCH)
- To calculate the average price for the steel product in each city, Umetal consolidates all price and volume data submitted by data providers in the respective city and calculates an average based on a volume-weighted arithmetic average.
- To attain the weightings for the volumes of each city, Umetal uses the nationwide steel product regional production figures compiled by CISA to allow for a fairer weighting system (given the seasonal nature of steel production in different regions of China).
* Source: World Steel Association, Jan 2011 http://www.worldsteel.org/?action=newsdetail&id=319
** For a detailed description of Cleartrade Exchange methodology please seewww.thecleartrade.com
