Since the breakdown in Spring 2010 of the 40 year old annual benchmark pricing system for global Iron Ore sales, price volatility has increased price exposures throughout the Steel supply chain.

The mills no longer feel confident to fix longer term product sales whilst there is uncertainty over their input costs and seek to pass potential exposure down the supply chain through surcharges: consequently the rolling mills and extruders suffer the same fate.

The emergence of OTC Iron Ore and Steel Swap contracts seek to provide limitation and stabilisation for these cash flow exposures, whilst adding flexibility to product sales terms.

Through the use of Iron Ore, Scrap and Steel product swaps:

• The Iron Ore producer can fix their forward sale price, or indeed eliminate a forward physical fixed price exposure, allowing them the to be flexible with their customers in offering longer-term fixed prices again.
• Primary BOS steelmakers can independently establish longer-term fixed Iron Ore supply prices and have the flexibility to revert to Spot Pricing should subsequent economic conditions deteriorate.
• Secondary EAF-based steelmakers can stabilise their scrap price volatility with OTC Scrap Swaps, at the same time as passing on physical pricing flexibility to their customers through the use of Steel Swaps or LME Billet contracts/swaps.
• The integrated producer that has control of their input costs can offer the same flexibility in their product pricing through using the relevant LME or OTC Steel contracts such as HRC, Billet, HDG and CRC Swaps
• Rolling mills, extruders and OEM manufacturers can use these to stabilise their input cost volatility.

As these financial markets evolve Mitsui Bussan Commodities Ltd will continue to offer market making services, credit facilities and risk management solutions to our global customer base.

Email Iron.ore.steel at mbcl dot co dot uk

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