Monday 25 February 2008

Steel and Gold: a new derivatives product – and a C@W predictions update


An important ‘business-as-usual’ development: the London Metals Exchange has brought out a steel futures contract which, amazingly has not previously existed. Volatility in world steel prices should amply justify this move and, provided enough creditworthy (!) players enter the LME’s famous Trading Ring to provide liquidity, it looks like a good move. Plenty of commodity traders have been doing nicely, thank you, so this shouldn’t be a problem.

Also doing nicely have been steel manufacturers, given China’s insatiable appetite and other booming areas of demand such as the energy sector. Whisper it softly, and no names, but there’s a bit of *ahem* a ‘sellers’ market’ out there, particularly in speciality grades, and buyers are not at all pleased. ‘Nuff said.

Some relief is on hand, however, in the form of fast-reducing dry bulk shipping costs, which have been at very high levels and representing a huge proportion of costs in the iron and steel industry. As forecast in the C@W Predictions for 2008, freight rates have been slumping - no mystery, a glut of new ships being built.

And a couple of other Prediction updates:

- GOLD blipped above $ 950 this morning (we predict it topping $ 1000)

- CHINESE food price inflation is 18.2% (we predict a riot ...)

ND

16 comments:

Mark Wadsworth said...

Wot? The market has responded to rising freight rates by building new ships? Which drive rates down again? Wonders will never cease!

Tim Worstall said...

Steel futures: the problem has always been defining physical delivery. There are 76 gazillion variations on steel. Cu, Ni, etc, it's been pretty easy to specify allowable deliverables. Steel, not so much.

tory boys never grow up said...

Introducing a forwards contract to handle volatility? I know the theory but it is an interesting question as to whether forward commodities markets have contributed to additional volatility rather than providing protection for a small number of genuine hedgers. I suspect that is an area where the economists jury is very much out.

Nick Drew said...

Mark - yes, it's amazing, isn't it ? (though it has to be said, the swing from peak to trough will be a bit extreme this time - not sure how *efficient* this is)

Tim - hi - this used to be said about coal also, but it's been solved fairly satisfactorily a good few years now: and needless to say the LME feel they've cracked that in the contract design with this one, too.

Nick Drew said...

TB - oh no, another misunderstanding between us ! When I said volatility in world steel prices should amply justify this move, what I meant was: the value of a hedge increases with volatility

I agree, of course, that it is underlying price (delta) that is hedged: hedging gamma is indeed altogether trickier.

What we can say about the vast new wave of traders and investors in commodities - we are all able to dabble there now - is that they have certainly brought liquidity (in the case of energy, sorely missing in the aftermath of Enron), and contrarian viewpoints, which you certainly need for a healthy market.

Old BE said...

Ooh good, that means I can get rid of my stash from under my mattress and replace it with paper.

Ellee Seymour said...

I'm really interested in what you say about Chinese food prices, I really fear for what is going to happen in future years regarding food security, which is why I enjoy working for NIAB which is trying to find solutions to this by developing new seeds from research. Please do let me know anything you hear about this. This is not new, it's been happening for a while, families in China cannot afford to buy meat to put on their tables.

Nick Drew said...

Ed - we need a little chat ... (BTW have responded to yr 'midwife' comment)

Ellee - pardon my ignorance, is NIAB into genetically engineered seed ? (am just watching a News item on deep-cold-storage of seeds under the Arctic Circle permafrost in Norway)

Steven_L said...

Well, having an income of less than £25k and liquid assets of less than a third of that no one seems to want to open me a deriavtives account that allows be to bet on commodities. It was ten time more bother opening what is basically a betting acount than taking out a creditcar, and a hundred times harder than backing red on a roulette wheel.

So who cares about steel. I'm more pissed off about the banks taking days to transfer money from one account to the next. I feel like I missed out big today.

Financial service regulation is crap if you ask me.

Steven_L said...

And Nick, whats this bollocks about hedging delta and gammar?

I'll leave it to the maestro:

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing." (Warren Buffett)

Nick Drew said...

Steven - I am justly rebuked.

Can't even blame TB (much as I'd like to): I started it

Anonymous said...

I have no money to buy gold - and if I did I would have to sell it...

Nick Drew said...

Mutt - if you go to Bullionvault.com they will give you a gram of gold FREE

no kidding

PS this is NOT financial advice

and I am NOT on commission

hatfield girl said...

Might the demand for sheet metal workers rise enough to tempt away the Speaker?

Nick Drew said...

HG - price goes up, Mr Speaker reverts to metal-basher, a Good Thing: hence we are long steel ... therefore a short position in the LME steel contract called for

classic risk management - see what you can do with derivatives ! (and you a skeptic, madam)

incidentally the LME contract is for billet steel, I feel there is a neat pun to be made about Gorbals Mick's current safe billet ...

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