London, 7 April 2011

LCH.Clearnet (LCH) made history yesterday, having processed the world’s first cleared swap transaction for ferrous scrap. The cash-settled contract uses The Steel Index (TSI) HMS #1&2 80:20 price for scrap imported into Turkey as its settlement index and was cleared through the LCH.Clearnet platform. LCH clearing services enable the industrial and financial communities to mitigate bilateral counter-party credit risk when trading Over-The-Counter (OTC) financial products.

The first trade, for 50 lots, was made between two trading houses and brokered by Freight Investor Services for settlement in the month of May. Each lot size for the contract is 20 metric tonnes, so this represents 1,000 tonnes of steel scrap. 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/t (HMS #1&2 80:20, CFR Iskenderun port) was locked in.

“We are delighted to have seen the first trade for ferrous scrap take place on the LCH,” says Tim Hard, Director of Steel and Scrap at TSI. “This is an important moment for the scrap and steel industries. Scrap forms the bulk of input costs for electric arc furnace (EAF) 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.”

“We are very pleased to have executed the first ferrous scrap contract.” notes Arthur Worsley, Scrap Derivatives Broker, Freight Investor Services (FIS), “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.”

“With increasing volatility in scrap prices we have seen growing demand for a swaps contract that can mitigate risks faced by the steel industry.” adds Sam Mehew, Steel Derivatives Broker, FIS, “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.”

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