Marko Kusigerski – Business Development Manager London Metal Exchange

30 June 2016

Steel price risk management – how LME

products can help your business

1

Agenda

Section Title

1. Overview of the new steel risk management products

2. Performance of the products since the 2015 launch

3. Benefits of hedging – how to protect your margins

2

1. Overview of the new steel risk

management products

3

London Metal Exchange

The origins of the LME goes back even further…

1. Origins in The Royal Exchange, London from 1571

2. The Jerusalem Coffee House, Cornhill, London early 1800

3. The London Metals and Mining Co. 1877

Originate from the need to formalise trading into one market place with:

• fixed trading times

• standard contracts specifications

• source of price ‘discovery’

From 1877 to today

4

The LME metals

New contracts have been added to the initial Copper and Tin contracts over

the past ~100 years…

1877 1920 1978 1979 1992 2002 2008 2010 2015

…and most LME contracts are already used by the ferrous industry

Copper Lead

Primary

Aluminium Nickel

Aluminium

Alloy NASAAC Steel Billet

Cobalt &

Molybdenum

Steel Scrap &

Steel Rebar

Zinc Tin

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LME’s new ferrous suite

Scrap Rebar

Underlying

index base

TSI Turkish Imports HMS #1&2 80:20, CFR

Iskenderun Port Platts Rebar, FOB Turkey Port

Lot size 10 metric tonnes

Contract months Monthly futures contracts going out to 15 months

Price quotation US Dollar per metric tonne

Trading venues Electronic and telephone

Construction Producer Reroller Scrap Processor

Scrap

(cash settled)

Rebar

(cash settled)

New scrap and rebar futures complete the value chain for long steel products

6

Key differences to current LME contracts

1 Cash-settled

2 Monthly contracts

3 Specific price location but with global

correlation

7

Why Turkey? Almost 25% of global scrap trade was imported into Turkey last year

Source ISSB, Bloomberg

0

5

10

15

20

25

Turkey OtherEMEA

Other AsiaPac

SouthKorea

NorthAmerica

Italy Germany Spain Belgium C.I.S. SouthAmerica

Millio

ns o

f to

nn

es

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International hub of the scrap market

Source ISSB, (Numbers rounded to nearest Mt). 2014 Imports

USA 21% 4 Mt

27% CIS 5Mt

Europe 47% 8 Mt

Turkey is uniquely positioned to set a reference price for global scrap prices

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Turkey is by far the largest rebar exporter 35% of global rebar trade was exported from Turkey

Source ISSB, Bloomberg

Turkey 35%

Ukraine 11% Spain

8%

Italy 8%

Portugal 5%

Berlarus 4%

Germany 3%

Other 26%

Total 21.5 million tonnes

Total rebar exports

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2. Performance of the products

since the 2015 launch

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For the first time there is a 12-month tradable forward curves for scrap and rebar LME Scrap tradeable quotes LME Rebar tradeable quotes

LME Rebar forward curve LME Scrap forward curve

Tradable quotes as of 28 June 2016 in the afternoon (UK time)

Forward curves as of 28 June 2016 (Closing Prices)

$195

$200

$205

$210

$215

$220

$225

$230

$235

LME SteelScrap

$365

$370

$375

$380

$385

$390

$395

$400

$405

LME SteelRebar

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Ferrous Scrap Futures

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16

Cu

mu

lati

ve L

ots

Cle

are

d

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New record: 27,000 tonnes traded on 24 June

Volume MOI

Scrap

Rebar

2,883 lots traded to date since 1 March

10,549 lots traded to date since 1 March

14

First voice-broked trade

10th May 2016

The new additions to the LME’s ferrous suite – LME Steel Scrap and LME Steel Rebar – have seen

considerable support from the market since their launch in November 2015. 35,990 tonnes (3,599 lots)

of scrap and 9,600 tonnes (960 lots) of rebar have been traded since the contracts launched. A new

single-trade record of 1,000 metric tonnes (100 lots) of scrap was set in last Wednesday’s voice-

brokered trade. Market open Interest has been steadily growing and bid/offer spreads have been as tight

as $0.50. The LME’s market-making programmes have ensured that tradable prices for the contracts

have been displayed since their launch and, for the first time ever, the global industry now has a 12-

month tradable forward curve for both products.

Phillip Price, Head of Market Risk Management and Derivatives Trading at Stemcor comments: “The

LME's steel contracts are already developing sufficient liquidity to facilitate effective hedging of

physical business and we are very excited about the prospect for further growth. Based on the

development so far we feel these launches have been the most successful in the commodities space

since iron ore swaps."

Spencer Johnson, Global Ferrous Risk Manager at INTL FCStone Ltd, comments: “The LME’s

collaborative approach to product development in the ferrous market has proven effective. INTL

FCStone Ltd has seen increasing demand from our clients to trade these new contracts and we are

happy to provide this additional service.”

Key step in industry adoption

Steel First

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FIS the first IB to trade scrap and rebar

28th June 2016

Freight Investor Services (FIS) executed the first introducing broker (IB) trades on the two LME steel

rebar and scrap contracts, the freight and commodity derivatives trader said on Tuesday.

The rebar trade involved Unicredit and Stemcor and the scrap trade was between Unicredit and

Goldman Sachs. The contracts, introduced late last year, are the first cash-settled futures contracts on

the LME and focus on the highly liquid Turkish market.

"Stemcor remains a strong supporter of the LME's new ferrous futures contracts and is extremely pleased

to have participated in the first trade that widens the group of potential participants in this vital forum for

price risk management," Stemcor head of price risk management & derivatives trading Phillip Price said

in a release.

But throughout 2016, open interest and business have progressively increased. To the end of May,

48,480 tonnes (4,848 lots) of scrap and 23,890 tonnes (2,389 lots) of rebar have been traded. Open

interest now stands at 1,867 lots of scrap and 391 lots of rebar.

"The LME has worked hard to attract commitment from the steel community for these contracts and FIS

believes they will offer a significant opportunity for the industry to manage risk," FIS managing

director John Banaszkiewicz said.

Key to enable access of all ferrous brokers into LME market

FastMarkets

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3. Benefits of hedging – how to

protect your margins

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Examples of hedging

…you are short in physical material because

you have sold before buying.

What options do you have?

1. Do nothing and be exposed to the risk of

prices moving against you

2. Buy now and hold the material, blocking

working capital and incurring storing

expenses

3. Buy forward on the LME and hedge your

exposure at a fraction of the cost of holding

physical material

…if you buy the material you expose yourself to

the risk prices can move against you.

What options do you have?

1. Do nothing and lose the opportunity

2. Buy the material and be exposed to the risk

of prices moving against you

3. Buy the material and sell forward on the

exchange, so that you hedge your exposure

while you find a physical buyer for the

material

If you are a fabricator and you are selling

rebar forward at a fixed price…

If you are a trader/service center that

normally works back to back and you see

material you like...

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Brokers offering LME ferrous contracts Full contact details published on LME.com/ferrous

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Contact the LME Ferrous team if you want to know more

Visit our website at lme.com/ferrous

Email ferrous@lme.com

Full list of members www.lme.com/trading/membership/

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Q&A

21

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