Core problem
Rising volatility takes a heavier toll on ferrous market participants.
We’ve learned to cope with it by back-to-back trading, physical stock holding and elaborate formulas in supply contracts. Their renegotiation has long been the only “tool” to scrape through market gyrations, damaging business relationships.
All these measures treat the symptom (volatility) instead of the root cause: uncertainty. Its familiar factors—business cycles, overcapacity, disruptions of supply and demand—are now compounded by ever-changing technologies, environmental and trade policies, and business models.
While technology should reduce economic uncertainty, the opposite is happening in commodity markets. As satellites track business activity, artificial intelligence makes forecasts, algorithmic and high frequency trading displaces humans, among other things, increasing complexity baffles the productive economy and diverts resources from investment and job creation to speculation, financial engineering, and rent-seeking.
Financial
Cost of finance Up
Finance availability Down
Commercial
Performance risk Up
Customer service Down
Strategic
Cost of capital Up
Enterprise value Down
Financial
Cost of finance Up
Finance availability Down
Commercial
Supply chain costs Up
Performance risk Up
Customer service Down
Strategic
Investment risk Up
Cost of capital Up
Enterprise value Down
Ensure costs
- Sell at fixed prices in advance (physical);
- Secure related costs (forward);
- Optionally, convert forward into physical.
Ensure sales
- Buy at fixed prices in advance (physical);
- Secure related sales prices (forward);
- Optionally, convert forward into physical.
Protect margins
- Buy or sell at floating prices (physical);
- Secure related costs or sales prices in advance (forward).
Mitigate risk
- Buy or sell under long-term supply agreements (physical);
- Reduce performance risk (forward).
Please refer to Examples for more information.
Amid the rise of commodity financialization, a burning question is how to organize the forward market in the best interests of suppliers and end-users.
Clarity
3-5 variables (pricing reference, quantity, time period; plus optional pricing corridor and post-trade processing) are easier to manage than procurement, sales, logistics, financing, payments, claims, etc.
Flexibility
Pricing corridors and hundreds of data points enable risk management across the ferrous value chain, from raw material purchasing to finished product sales, in line with regional specifics.
Security
When required, settlements under forward contracts may be secured by first-tier financial institutions in several ways, including escrow, insurance and clearing.
Liquidity
The forward market is far wider than anyone’s network of suppliers and customers. Together, we ensure that its core liquidity comes from and serves the real economy.
In a sea of change and complexity, forward contracts are constants to chart and stay the course.
Risk management is part of broader questions of ferrous markets organization and price formation, which are decided now for next decades.
The more finance serves finance instead of the real economy, the more financial intermediaries profit from market uncertainty and push related services and agenda. The more sway they hold over pricing, the more hedging becomes regulated, expensive, and indispensable to the industry.
Digital economy provides a sustainable way to MANAGE and REDUCE uncertainty and volatility in decentralized commercial markets—the way steel and steelmaking raw materials are traded today.
You can shape the evolution of ferrous markets by joining the platform as a user and/or stakeholder. The demo is one click away.
Sustainable by design
Sustainable by design
A forward pricing utility owned by market participants