ICAP原材料价格风险管理.pdf

Hedging the Risk of Raw Materials Price Fluctuations 19th 20th November 2012 Presented to 8th Steel Markets Asia Conference 2012 Presented by G S Slavov Managing Director Research Basic Resources Dry Bulk Freight 2 2 2 ICAP Plc The world s largest voice interdealer broker World s largest voice and electronic interdealer broker with daily average transactions in excess of US 1 4 trillion Covers a very broad range of OTC over the counter financial products and services in commodities foreign exchange interest rates credit and equity markets as well as data commentary and indices More than 5 000 staff with a strong presence in each of the three major financial markets London New York and Tokyo Operates in more than 32 countries FTSE 100 company ICAP Shipping International Limited 2012 8 11 11 12 18 40 10 13 9 11 18 39 20102011 Rates FX Commodities Emerging markets Credit Equities Revenue by asset class 1605m 1741m Market CoverageLondonNew YorkSingapore Hong Kong Rio de JaneiroSydney Interest Rates Credit Commodities Foreign Exchange Equities Shipping Our offices a non franchised truly global operation 3 3 3 3 LondonUSAChinaSingaporeDelhiGermanyGibraltar Dry Chartering Tanker Chartering Projects Sale Purchse FFA Dry bulk FFA Tanker Research 3 ICAP Shipping Over one century of shipbroking expertise Headquartered in the heart of London s financial district with over 230 staff worldwide in Hamburg Gibraltar Singapore Beijing Shanghai Copenhagen New Delhi Stamford CT ICAP Shipping delivers shipbroking solutions covering wet and dry cargo chartering sale and purchase FFAs research and operations The company s proficiency in this area is recognised by its seat on the Baltic Exchange Panel ICAP Shipping is a Member of the Baltic Exchange ICAP Shipping shares its roots in the proud history of over a century of tanker and dry cargo shipbroking Following a successful JV in freight derivatives with J E Hyde ICAP went on to secure their physical shipbroking business acquiring the company in 2007 Tanker market presence was significantly enhanced by the integration of Capital Shipbrokers in 2008 Global market coverage has been fully achieved through organic growth and through further the acquisition of Skaarup Shipbrokers in the USA Island Shipbrokers in Singapore JV with CTI Shipbrokers in India ICAP Shipping International Limited 2012 Our offices a non franchised truly global operation 4 4 4 ICAP Energy Largest global commodities franchise Our offices a non franchised truly global operation PRODUCT OFFICELondonAmsterdamBergenCopenhagenGenevaMadridNew YorkCalgaryHoustonSingapore Electricity Natural gas Oil derivatives Weather derivatives Fuel oil Renewables Fertilizers Coal Nuclear fuel Residual oils Emissions Cross commodity opt Ranked 1 European coal broker 2011 by Energy RISK Magazine Industry expertise in sourcing marketing and facilitating transactions on any energy market Range of clients including banks hedge funds utilities and producers Offices in London Houston New York and Louisville covering North American European and Australian swaps and options markets Only broker to provide 24hr global coverage in the international energy market ICAP Energy provides price discovery and execution services in a wide range of OTC products coal crude oil and products electricity natural gas metals carbon emissions weather products Largest global commodities franchise with over 400 brokers and comprehensive coverage across markets Named Broker of the Year in a poll of 1 500 market participants conducted by Energy RISK Magazine ICAP Shipping International Limited 2011 5 5 1 Why do we need to hedge Macroeconomic conditions unstable Production costs keep rising Seasonality re de stocking cycles Changing trading environment on the underlying physical markets Trade patterns constantly shifting FOB CIF arbitrage Raw material prices volatility Changing correlation between the asset classes 6 6 6 6 6 Macroeconomic conditions remain challenging with Capacity Utilization flattening and PMI below 2011 levels We remain long term positive but at the same time we cannot ignore some warning signals Industry capacity utilization still below pre crisis levels Debt and de leveraging driven slowdown worldwide USD strengthening not US government policy but rather flight to quality Stagnant manufacturing and sluggish lending EU27 demand is weak not expected to pick up this year Global manufacturing sentiment Industrial capacity utilization 20 30 40 50 60 70 Jan 08Jan 09Jan 10Jan 11Jan 12 Index USAEUJAPANCHINA ICAP Shipping International Limited 2012 Global Risk Aversion 4 3 2 1 0 1 2 3 4 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 40 50 60 70 80 90 100 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Percent points 0 20 40 60 80 100 120 Index points USAChinaWorldEUJapan Index Short term macroeconomic conditions Global overview 7 7 0 50 100 150 200 250 300 350 400 Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12 per tonne Steel production cost structure BF Blast margins imports from Brazil 0 100 200 300 400 500 600 700 800 900 Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12 per tonne 0 5t Coke domestic 1 5t Brazil FOB1 5t C3Steelprice basket US steel production cost structure EAF 0 100 200 300 400 500 600 700 800 900 1 000 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 per tonne 1 15t scrap0 44 MWh MTRail VA INmarginSteelprice basket 0 50 100 150 200 250 300 350 400 Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12 per tonne Blast margins US production Short term market outlook Profitability of steel industry is the key 8 8 8 Domestic iron ore production seasonality Domestic production of iron ore subject to strong seasonal fluctuations But prices well supported on the back of higher production costs The import trend when seasonally adjusted suggests that imports should rise towards Q4 0 20 40 60 80 100 120 140 20052006200720082009201020112012 Mt Iron ore imports seasonality 0 10 20 30 40 50 60 70 JanFebMarAprMayJunJulAugSepOctNovDec Mt 2010200920082007 2006200520042003 2011Average2012 ICAP Shipping International Limited 2012 Short term market outlook Seasonality in play 9 0 5 10 15 20 25 30 35 40 45 Sep 11Dec 11Mar 12Jun 12Sep 12 tonne 45 50 55 60 65 70 Mln Tonne China IO ImportsPrice Diff 9 9 9 9 China s iron ore imports price differential The iron ore production costs in China are generally 2 3 times higher than that in Australia Brazil The price differential between domestic ore and international ore will affect China s import appetite A falling international iron ore prices will eventually push China to rely more on the international market The current port stocks are available for around 32 days of consumption whereas this level was 21 days in average during 2006 07 and 28 days in average during 2009 10 The average level of iron ore stocks at China s large and medium sized steel plants is around 21 days the current level is only 13 days The poor profit margin explains why steel plants postponed their restocking activities Short term market outlook China s iron ore re de stocking cycles ICAP Shipping International Limited 2012 0 10 20 30 40 Sep 09Jan 10May 10Sep 10Jan 11May 11Sep 11Jan 12May 12Sep 12 Days 2 1 0 1 2 3 4 5 Large and medium sized steel mills Monthly profit margin rhs Iron ore stocks at plants plants profit margin Iron ore stocks at China s major ports 0 5 10 15 20 25 30 35 40 45 Jan 06Jan 07Jan 08Jan 09Jan 10Jan 11Jan 12 Days 0 20 40 60 80 100 120Mln T Days of productionIO stocks rhs 10 Market volatility uncertainty Price formation Capacity utilization FOB CIF Arbitrage Source ICAP Steelhome The Baltic Exchange Chinese steel production capacity is the most volatile amongst the top 5 producers Bearing in mind that China is also the biggest producer in the world this introduces significant volatility to the market Different approach to cope with that is needed The breakdown of the annual contract system created many opportunities It also introduced high volatility to a market which was traditionally extremely stable Many still struggle to adapt China s iron ore imports price differential 80 100 120 140 160 180 Sep 11Nov 11Jan 12Mar 12May 12Jul 12Sep 12Nov 12 tonne Chinese domestic 62 adjusted India CIF 62 adjusted Aus CIF 62 adjusted Brazil CIF 62 adjusted 0 5 10 15 20 25 30 35 40 45 Sep 11Dec 11Mar 12Jun 12Sep 12 tonne 45 50 55 60 65 70 Mln Tonne China IO ImportsPrice Diff 11 11 2 Forward markets overview Paper iron ore trading volumes Correlation between spot forward for steel iron ore and coking coal Market volatility 12 12 Iron ore swaps market Trading activity Monthly trading volume Mln tones The trading volume has increased significantly over the past years Q2 2012 registered the highest so far trading volume on record 23mln tonnes Q3 is expected to far exceed that record Around 8mln tonnes are traded each month as cleared swaps We understand that the share of the bilateral transactions keeps falling gradually and it is currently at around 15 20 of total We estimate that in 2012 the annual US value of the market will exceed 20bn with volume in metric tonnes reaching nearly 140mln tonnes This represents around 20 of the underlying physical market seaborne import flow into China Quarterly trading volume vs Annual US value 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 Q2 2009Q4 2009Q2 2010Q4 2010Q2 2011Q4 2011Q2 2012Q4 2012 Mln mt 0 2 4 6 8 10 12 14 16 18 20 22 Bn us Market volume mt Annual market volume us rhs 0 20 40 60 80 100 120 140 160 2009201020112012 Mln mt 0 2 4 6 8 10 12 14 16 18 20 22 Bn us Market volume mt Annual market volume us rhs Annual trading volume vs Annual US value 0 2 4 6 8 10 12 14 16 18 20 22 24 Apr 09Oct 09Apr 10Oct 10Apr 11Oct 11Apr 12Oct 12 Mln tones clearedbilateral ICAP Shipping International Limited 2012 13 13 Steel Correlations Volatility Dynamics Correlation between Spot Forward Correlation between the cash and forward market can vary enormously from 80 to 95 Due to number of factors discussed above over time the correlation have weakened and stabilized around 50 fairly weak Market volatility Steel market volatility declined over the last couple of years but pockets of nervousness remain The average cash market volatility is only marginally lower than the forward market 9 95 vs 9 98 Source ICAP Bloomberg ICAP Shipping International Limited 2011 100 80 60 40 20 0 20 40 60 80 100 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 0 5 10 15 20 25 30 35 40 45 50 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Cash3M 14 14 Iron ore swaps market Correlations Volatility Dynamics Correlation between Spot Forward Correlation between the cash and forward market can vary enormously from 35 to 99 Over time the correlation has been steadily weakening linear regression line in red Market volatility Iron ore market volatility declined over the last couple of years but pockets of nervousness remain The average cash market volatility is marginally lower than the forward market 3 8 vs 3 93 0 2 4 6 8 10 12 14 Jan 10May 10Sep 10Jan 11May 11Sep 11Jan 12May 12Sep 12 Cash 1Q 60 40 20 0 20 40 60 80 100 Jan 10May 10Sep 10Jan 11May 11Sep 11Jan 12May 12Sep 12 ICAP Shipping International Limited 2012 15 15 Coal swaps market correlation 20 0 20 40 60 80 100 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Spot vs 1MSpot vs 1QSpot vs 1Cal Correlation between spot physical and the front month contract is strongest The periods of high correlation appear to be diminishing in terms of duration as illustrated here by the steadily reducing size of the grey areas This suggests that we are entering higher risk environment and therefore there will be stronger need for risk management Coal swaps market volatility 0 5 10 15 20 25 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 API4 1MAPI4 1QAPI4 1CalAPI4 Spot physical Several pockets of high volatility have been identified over the recent years Their duration has been fairly steady over time varying between 6 and 12 weeks each Understanding the structure and duration of volatility is vital for both successful hedging and proprietary trading ICAP Shipping International Limited 2011 Coal Correlations Volatility Dynamics 16 16 3 Statistical arbitrage between the spot paper steel production margins What are the cost elements for producing 1 tonne of steel Which production cost centers can be hedged against future adverse price movements Trading scenarios 17 17 17 17 Arbitrage Steel producers cost structure ICAP Shipping International Limited 2012 Iron ore 23 Margin 22 Coal 13 Scrap 9 Fluxes 3 Ferroalloys 3 Emissions 2 Other costs 2 Refractories 1 Oxygen 1 Coal freight 1 Electricity 2 IO freight 2 Labour 2 Scrap freight 0 Depreciation 6 Interest 7 The major five production cost centers are iron ore coal scrap interest on existing loans and asset depreciation These are however not the most volatile one Volatility of 10 15 is normal for cost elements such as alloys emissions electricity or freight The diagram above shows in dark blue the costs which can and should be hedged We also include these in our statistical arbitrage model 18 18 18 18 ICAP Shipping International Limited 2012 Iron ore Iron ore can be hedged through the available swaps market The average daily swaps volume is 450 500 000 metric tonnes which gives sufficient liquidity for a small medium size steel mill to hedge its exposure out Coal Coal can be hedged through the nascent coking coal swaps market The liquidity is poor with many bilateral transactions typical for the early stages of any market development Using thermal coal swaps as a proxy should not be excluded as an option on this stage Freight Freight can be hedged through the available swaps market The average daily swaps volume is 4 4 5mln tonnes which gives sufficient liquidity for any hedging operation Scrap Scrap can be hedged through the available swaps market The liquidity is poor with many bilateral transactions typical for the early stages of any market development Ferroalloys Ferroalloys can be hedged through the available futures markets for base metals Two of the most important alloys in the steel making process are ferroaluminum FeAl and ferrochrome FeCr The spot market price for FeCr is 95 correlated to aluminum future price therefore we choose aluminum to hedge also the ferroalloy exposure Electricity Emissions Electricity can be hedged through the available futures European power markets Emissions can be hedged through the available futures EUA markets These are very liquid markets which give sufficient liquidity for any steel mill to hedge Arbitrage The alchemy of hedging the steel price 19 19 19 19 Arbitrage Spot cash vs Forward paper margin ICAP Shipping International Limited 2012 Both the spread between the margins and the ability to trade in out each of the components create attractive opportunities 0 00 50 00 100 00 150 00 200 00 250 00 300 00 350 00 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 usd t FORWARD MARGIN SPOT MARGIN Scenario 1 Both steel price and raw material costs likely to increase Buy the raw material components in the forward margin Leave your steel price exposure open Scenario 2 Both steel price and raw material costs likely to fall Buy steel futures Leave your raw material exposure open Scenario 3 Paper margins Cash margins Buy raw material components Sell steel futures Scenario 4 Paper margins Cash margins Sell raw material components Buy steel futures Trading scenarios Cash vs Paper production margins 20 20 4 Reasons to trade the paper margins Challenging macroeconomic conditions Mitigating the underlying physical market uncertainty volatility The forward curve provides market transparency Improve profitability through locking attractive raw materials price Improved liquidity across the asset classes involved in the hedge Arbitrage Conclusions ICAP Shipping International Limited 2012 This report has been prepared by ICAP Shipping or its affiliates ICAP Shipping and is addressed to ICAP Shipping customers only and is for distribution only under such circumstances as may be permitted by applicable law This information has no regard to specific investment objectives financial situation or particular needs of any specific recipient It is published solely for informational purposes and this information is not and should not be construed as an offer or solicitation to sell or buy any product investment security or any other financial instrument ICAP Shipping does not make any representation or warranty express or implied as to the accuracy completeness or correctness of the information contained herein nor is it intended to be a complete statement or summary of the sec