Cargill // Steel Swaps

8/8/2019 Cargill // Steel Swaps

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Derivatives and Risk

M n emen ser ers ec i e

Athens, Greece

CONFIDENTIAL. This document contains trade secret information. Disclosure, use or reproduction outside Cargill and inside Cargill, to or by those employees who do not havea need to know is prohibited except as authorized by Cargill In writing. (Copyright Cargill, Incorporated 2007. All rights reserved.)


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The reality for the steel industry however is that change is coming


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A Few Myths About Derivatives

Hedging and risk mitigation, when correctly done, is a valuable tool andreduce the market risk, i.e. allows to lock in margin

Derivatives are onl dan erous for those without h sical market knowled eand trading/risk management strategy

Derivatives are only for speculators

. . . ,derivatives to hedge risk

Yes speculators can participate but they bring liquidity and take risk

n exes are naccura e Indexes are only as good as the data collected

From our experience, the CRU HRC pricing reflect the physical spot marketuite well

Paper markets cause additional volatility

Steel, Iron ore and Scrap, which historically have had no paper markets,

Industries with paper can actually be less volatile

It is im ortant to understand the h sical market fundamentals behind

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derivatives, and then how to apply derivatives to manage risk


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Who are the main players in a steel Derivative market?

Role and BenefitRole: Bring together buyerand seller for financialli uidit of roduct HRC

Role and BenefitRole: Provide Physicaldelivery of product HRC.

Financial

Companies

Banks

Financial

Companies

Banks

Steel

Producers

SteelMills

Steel

Producers

SteelMills

Benefit: Additional service

they can offer their clients.

Benefit: Ability to hedge andlock in margin on fixed price

contracts. (ex. Sell paper

ro ers ro ers ra ngcompanies

ra ngcompanies

delivery physical on CRU

floating price)

HedgeFunds

Privatemoney

PensionFunds

HedgeFunds

Privatemoney

PensionFunds

SteelConsumers

OEMs

SteelConsumers

OEMs

Role and BenefitRole: Provide financialliquidity of product HRC

Role and BenefitRole: Provide physicalliquidity of product HRC

erv ce enters

Construction

erv ce enters

ConstructionBenefit: Additional marketoutlet to invest capital for

investors to express their

Benefit: Ability to hedge andlock in fixed prices for

extended period of time. (ex.

take delivery on floating priceCRU.

All 4 sectors must play an active role for the derivative market to develop

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and provide the necessary liquidity for a healthy and active exchange butthe industry (steel producers and users) must want the tool


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How to use financial tools

1. Lockinprofits

nanc a oo sa ow econsumer o oc n e r u urecos o s eeensuringthemthatwhentheproducetheirproduct612monthslaterthey

willknow

their

cost

ensuring

amargin

2. Managepricerisk

Becauseoftheincreaseinsteelpricevolatilitycompanieswhomusthold23monthsofinventoryareexposedtosignificantlossesinarapidlyfalling

market.Theproperuseofriskmanagementproductswouldallowthese

consumerstheabilitytoderisktheirexposuretoheavylossesbyentering

nto uturessa escontracts

Financial tools when used correctly and in conjunction with physical deliverycan provide increased opportunities to reduce risk and lock in profits


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ReduceRisk Hedging

So your over all profit is fixed

Time

Hedging is removing exposure or risk by offsetting it with something of

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the opposite risk


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IronOre,SteelandFreightDerivatives

Example:Iron

Ore

TSI

index

and

SGX

forward

prices

th

duringthesummertheIronOremarket

correctedinAugandhasfoundanewfloor

inthe

last

few

days

and

current

price

is

Backwardation (futurepricelowerthan

current):

March11

traded

today

(Sept

21th 10)

at

140.00 124.00

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Example:IronOreTSIindexandSGXforwardprices

IronOre,SteelandFreightDerivatives

Case 1: From current 140 prices fall.At maturity (Mar 2011) the TSI price is 90

Case 2: From current 140 prices rally.At maturity (Mar 2011) the TSI price is 170

140

170

90

140

For paper settlement , on end Mar 2011, the buyergivesthe seller the difference ie 124 -90 = 34

usd/mt

For paper settlement, on end Mar 2011, the buyerreceivesfrom the seller the difference ie 170-124

= 46 usd/mt

Physical effective sales/buy price: 90Paper transaction : 34Total transaction price: 124

Physical effective sales/buy price: 170Paper transaction: -46Total transaction price: 124

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On21.09.10,theMar2011IronOrepricehasbeenfixedto124,withthepapertransactionsgains/losses

offsettingany

losses/gains

on

the

physical

market.

Thepriceriskhasbeenhedged


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Spot Price and Indices Comparison

The Iron Ore spot price has remained quite volatile over the past 1 year

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HotRolledCoil,PigIronandScrapPrices1200.00

1000.00

800.00

400.00

600.00

200.00

.

0.00

ary

0

5

ch

05

ay

0

5

uly

0

5

er

0

5

er05

ary

0

6

ch

06

ay

0

6

uly

0

6

er

0

6

er06

ary

0

7

ch

07

ay

0

7

uly

0

7

er

0

7

er07

ary

0

8

ch

08

ay

0

8

uly

0

8

er

0

8

er08

ary

0

9

ch

09

ay

0

9

uly

0

9

er

0

9

er09

ary

1

0

ch

10

ay

1

0

uly

1

0

Janu

Ma J

Septem

Novem

Janu

Ma J

Septem

Novem

Janu

Ma J

Septem

Novem

Janu

Ma J

Septem

Novem

Janu

Ma J

Septem

Novem

Janu

Ma J

CRU(nt) AMMBushling(Chicago) RyanNotes"Mean"

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e past 5 years ave emonstrate stee an raw mater a pr ce vo at ty an

we expect this trend will continue into the future


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Derivative Volume Evolution60,000

70,000

200,000

250,000Nymex Volumes and Open InterestOI (MT) Volumes(MT)

3,500,000

30,000

40,000

,

100,000

150,000

1,500,000

2,000,000

2,500,000 IronOre

Swap

Volumes

0

10,000

20,000

0

50,000

0

500,000

1,000,000

LME Med Volumes and Open InterestOI (MT) Volumes(MT)Volumes Open Interst (MT)

SGXVolume(mt) LCHVolume(mt) TotalVolume(mt)

4000000

5000000

6000000

1200000

1400000

16000001800000

ton)

ton)

e ars

80,000

100,000

,

150 000

200,000

,

1000000

2000000

3000000

200000

400000

600000

800000

lots

(x1

lots

(x1

40,000

60,000

50 000

100,000

Volume Open Int

0

,

0

28.04.2008 28.04.2009 28.04.2010

Derivative markets are picking up in both volume and participants as pricevolatility continues to impact results and expectations in the Ferrous Industry


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Issues to watch going forward

LMEBilletwarehouse

LMEhasopenedaNorthAmericaBilletwarehousethatwillallowatrueglobaldeliveryforitsbilletcontract

ScrapExchange

Anumberofindexesarelookingtolaunchascrapexchange

MoreandMorecounterpartiesarecomingintotheFerrouser va vemar e s

Automotive,Energy,Servicecenters,Appliance,Heavyequipment

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change but rather work with Cargill to help see how change can enhance yourbusiness


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ThankYou

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Cargill // Steel Swaps