Tackling financialization

Commodity derivatives create a link between physical and financial markets that makes them susceptible to speculation.

The last two decades have seen an unprecedented surge of institutional and retail investments in commodity futures, which overtook hedging transactions by a wide margin.

A number of academic studies have demonstrated how speculative trading in commodity derivatives and herd behavior exacerbate market volatility, transmitting financial markets’ dynamics to futures prices, commodity inventories and spot market prices.

UN analysis

The United Nations working paper on the last financial crisis and economic development draws the following conclusions:

“These effects of the financialization of commodity futures trading have made the functioning of commodity exchanges increasingly contentious.

They risk reducing the participation of commercial users, because commodity price risk hedging becomes more complex and expensive.

They also cause greater uncertainty about the reliability of signals emanating from the commodity exchanges with respect to making storage decisions and managing the price risk of market positions.

It has therefore become necessary to consider how the functioning of commodity futures exchanges could be improved so that they can continue to fulfill their role of providing reliable price signals to producers and consumers of primary commodities and contributing to a stable environment for development.”

Market volatility

A boon to investors, a bane to everyone else

Market volatility

A boon to investors, a bane to everyone else

Steel market is no different

In April 2016, following regulatory easing, trading volumes in steel and iron ore derivatives surged exponentially, with SHFE rebar and DCE iron ore futures becoming the first and the third most-traded commodity derivatives globally. In doing so, they surpassed ICE Brent and NYMEX WTI oil futures, which had been the most-traded commodity derivatives for several decades. According to Bloomberg, the average holding of trading positions was less than 3 hours.

Daily trading volumes in DCE iron ore and SHFE rebar derivatives sometimes exceed China’s annual iron ore imports and all shares traded on China’s equity markets, respectively.

Since all financial markets are interconnected through arbitrage, no commodity exchange is insulated from speculative frenzies elsewhere.

For better or worse, the more investors pile in steel futures, the more they influence forward price formation.

Back to basics
As a direct price risk management platform, SteelHedge provides a simple commercial alternative to financial derivatives.

We help you and your peers tackle the financialization of steel markets by

  • Creating a gated marketplace for commercial hedgers;
  • Introducing an innovative paper contract grounded in physical markets;
  • Promoting a multilateral ecosystem focused on servicing commercial hedgers worldwide.

By disconnecting physical and financial markets, we help the steel value chain safeguard price formation from speculative influence, taking hedging back to its roots.

Grounded by design

A hedging system aiming to reduce market volatility

Grounded by design

A hedging system aiming to reduce market volatility

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