Launch of SGX HRC Steel Index Futures and Swap
Michael Syn, Head of Derivatives at SGX
The SGX HRC Steel Index futures and swaps will form part of the existing AsiaClear product suite. The futures contract is fully fungible with the corresponding swap cleared by SGX-DC and will be listed for trading and clearing on SGX-DT and SGX-DC, respectively.
Promising Prospects
The prospects for SGX HRC Steel Index futures and swaps are promising with emerging economies in Asia (mainly China, India, and ASEAN) accounting for 70% of global steel production and consumption. World Steel Association statistics also reveal that ASEAN’s apparent steel consumption has been growing at a CAGR of 9% per annum since 2009, to reach 60 million tons in 2012. A significant portion of this demand is driven by flat rolled steel products imported mainly from countries in North Asia (i.e. Japan, Korea, China, and Taiwan).
In addition, urbanization and industrialization in Asia coupled with ongoing global development issues predict a high volatility environment. Just this month, TSI’s benchmark 62% iron ore fines price broke out of the US$130-140 per metric tonne trading range to $129.50 per metric tonne. The lower prices saw a corresponding spike in average daily volumes for SGX Iron Ore products to average 6,477 contracts (2.3 million metric tonnes) over the week of 8 January 2014 to 14 January 2014. Open interest grew 14% to 91,415 contracts (35.3 million metric tonnes) over the same period—reflecting a growth in hedging activity. SGX’s market share relative to Dalian Commodity Exchange is 73%^.
Meanwhile, other raw material prices (including coking coal) have also been facing downward pressure though finished steel prices have been rising. SGX HRC Steel Index futures and swaps can aid participants in navigating this period of uncertainty through managing price and cash flow certainty for business sustainability.
Complementary to Iron Ore Products
In particular, given SGX’s leading liquidity in iron ore, market participants are uniquely able to trade or hedge the “hot spread” between iron ore and finished steel—the fundamental economics of steelmaking. Iron ore and steel producers/consumers concerned with volatile future prices, can hedge their price exposures through holding positions in both SGX Iron Ore products alongside SGX HRC Steel products.
Margin offsets between SGX Iron Ore and SGX HRC Steel products also present the opportunity for more efficient margining. Specifically, market participants can enjoy capital efficiencies delivered through margin credits of approximately 50%* between holding opposite positions in steel and iron ore products (e.g. long SGX Iron Ore futures and SGX HRC Steel futures).
