Core problem

Rising uncertainty in ferrous markets has a cost that is shared by all.

We’ve learned to cope with it by back-to-back trading, hand-to-mouth purchasing, 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, such as demand cyclicality and overcapacity, 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.

Implications
Neglecting the root cause exacerbates the problem and ramifications for all involved:

Financial

Earnings volatility         Up

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

Financial

Earnings volatility         Up

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

To reduce uncertainty, we need better visibility into the future—a forward market reflecting our complex supply chain, regional specifics and current developments.
Forward market
Managing cash flow is easier, safer and less expensive than managing the supply chain, let alone trying to predict the unpredictable:
Z

Ensure costs

  • Sell at fixed prices in advance (physical);
  • Secure related costs (forward);
  • Optionally, convert forward into physical.
Z

Ensure sales

  • Buy at fixed prices in advance (physical);
  • Secure related sales prices (forward);
  • Optionally, convert forward into physical.
Z

Protect margins

  • Buy or sell at floating prices (physical);
  • Secure related costs or sales prices in advance (forward).
Z

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.

Forward contracts
Cash-settled contracts developed with our stakeholders enable forward pricing and risk management in commercial (as opposed to derivative) markets:
b

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.

f

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.

Have your say

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

A forward pricing utility owned by market participants

Sustainable by design

A forward pricing utility owned by market participants

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