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LME to launch India ferrous scrap futures contract based on S&P Global Platts index

LME to launch India ferrous scrap futures contract based on S&P Global Platts index

News is brought to you by Mr. Shailesh Karia

Published on date 16th Oct 2020.

London — The London Metal Exchange will further expand its ferrous scrap portfolio, with the launch of a futures contract for India`s imports of containerized shredded material, based on S&P Global Platts` ferrous scrap India index.

The new futures contract, expected to be launched in early 2021, will settle on a basis of Platts` containerized shredded scrap CFR Nhava Sheva index.

The contract will join LME`s existing ferrous listings while being one of the first to refer to containerized scrap in India. It is designed to help address basis risk between geographical and regional differences among India, Turkey, and eastern Asia markets.

The new contract`s coverage basis on containerized shipments is also expected to help address significant differences between the bulk and containerized markets for scrap.

Traditionally, containerized shipments of scrap hold a liquidity advantage over bulk shipments. This is because containerized scrap contracts have tended to see smaller parcel sizes, from a minimum of 200 mt, up to anything like 5,000-10,000 mt per deal into the Indian subcontinent, making trades more frequent over its bulk shipment option.

The LME launched its Turkish scrap futures contract in late 2015, which settles against the Platts premium HMS 1/2 (80:20) CFR Turkey index, and this contract has consistently remained the exchange`s most liquid ferrous contract.

With India now growing to have become the second-largest crude steel producer, behind China, trading interest with the nation has been growing significantly. This is also supported by changing global trade flows amid growing protectionism in recent years, which has led international sellers to seek new business opportunities within the physical markets.

Physical market participants in India and across Asia have remained wary about using the Turkish contract because of the basis risk between regions, as well as between bulk and containerized shipment differences.

Turkey is the world`s largest scrap importer, and consequently a key sentiment driver within global seaborne markets. India, which is Asia`s largest scrap importer, can however often see divergent price movements, given different restocking cycles, fundamentals, and shipment preferences.

Still, the correlation between the two markets remains strong, with containerized shredded scrap ex-UK and EU a key import source for India, and bulk scrap from the same two regions a key import source for Turkey. This correlation over 2020 to date has been put at 94.12%, compared to a correlation of 95.26% from 2014 to date. The Indian import scrap price moved largely in line with the Turkish benchmark, despite a strict lockdown, which saw scrap demand and steel production activity in India plunge over H1 2020.

In 2018, the Turkey deepsea premium HMS 1/2 (80:20) price did, however, diverge from the containerized India import shred market, with the correlation softening to 85.37%, as the impact of US Section 232 was felt.

The Indian shredded scrap futures contract will have wider regional significance and, just like the Turkish scrap contract, will influence the neighboring Pakistan and Bangladesh markets. and may reflect regional market developments.

Additionally, being centrally located, India also imports scrap from a wide range of sources, including the aforementioned UK and EU markets. Indian mills buy significant volumes from the US West Coast, South Africa, and UAE, as well as Singapore and Australia.


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