LME WEEK: Scrap futures traded volumes seen rising despite lower volatility

The London Metal Exchange sees scrap futures volumes rising despite lower volatility compared to the past years due the strong pipeline of new participants who are keen to trade to cover themselves with financial instruments in case volatility reappears, Alberto Xodo, product specialist at the LME, said Oct. 1 on the sidelines of the S&P Global Commodity Insights LME Week Breakfast Briefing 2024 focus on market trends.

Xodo said that it was likely that by year-end the traded volume for ferrous scrap CFR Turkey futures, which are settled against the monthly average of Platts physical assessment, will be around 12 million-15 million metric ton. Over January-September, the traded volume for the contract totaled 9.4 MMt, according to LME data.

Since its launch in November 2015, the LME steel scrap contract has gained momentum as the industry sought a transparent tool to manage price risk with volumes increasing from 500,000 t recorded in 2016 -- the first full year after the launch -- to 8.1 MMt by 2023.

"The game changer was in November 2022 when we launched the LME's liquidity window initiative to boost screen trading volumes for the contract, which runs between 4 pm and 4.30 pm UK time on a daily basis on LMEselect -- the exchange's electronic trading system -- for contract months 2, 3, and 4 on the forward curve," Xodo explained, underscoring how the market clearly liked it as volumes moved from 4 MMt recorded in 2022 to nearly double that the year after.

Increase in thresholds

With the increase in volumes, the LME raised the thresholds at which additional margin requirements are asked of market participants with larger positions because the definition of what constitutes a large position changed. "What last year would have been considered to be a large position is often just an average size position these days. This growth has now been incorporated in the thresholds for additional margin, thus lowering the costs of holding positions for market participants," Xodo said in his presentation.

"As of last Thursday, the first threshold was increased from 8,000 to 19,000 tons, the equivalent of a short sea cargo or half a deep-sea cargo going to Turkey. It was like something that you couldn't even dream we could get to. It's just something I wanted to share that as liquidity increases, we are seeing participants increasing their positions, using these contracts more and getting to the size that is actually related to the physical trade," Xodo said during the breakfast event.

The increase in the LME Turkey scrap futures volumes reflects the importance that scrap will continue hold as a key raw material as the steel industry shifts towards low carbon steel production.

"We will see more and more protectionism from governments to keep the scrap inside their countries as we see more EAFs," Abdi Salad, Editor, EMEA Metals at Commodity Insights said during a panel discussion.

According to data from Platts, part of Commodity Insights, spot market prices recovered from a low of $360/t CFR in August to $370/t CFR on Sept. 9, as sellers kept their offers firm amid a recovery in iron ore prices in China which led to higher billet offers from the Far East.

Platts assessed Turkish imports scrap at $370/t CFR Sept. 30, up $1.50/t from Sept. 27. Since the beginning of the year prices have dropped by $43/t.

"The slight increase in scrap imports [prices] despite the apparent depressed buyer interest is likely due to the mills having added lots of production capacity over recent years, with [Turkey] now sitting at a crude steel production capacity of 65.35 MMt/year, up from 59.3 MMt/y in 2023, and the improved rebar sales in the year so far," Salad said.

Platts assessed the LME October contract at $397.50/t on Sept. 30. The November contract was assessed at $401/t, while the December contract was at $399/t.