Scrap futures trading was at the forefront of discussions at the Bureau of International Recycling ferrous division meeting Tuesday in Hong Kong.
Chen Ye from the Shanghai Futures Exchange, home to a rebar futures contract that is the world's most liquid traded steel futures, continues to see potential for launching scrap futures in China.
Chen believed that a Chinese scrap futures could be viable in three to five years, noting that there has been "tremendous developments in steel scrap." He thought physical delivery could be a feature of a SHFE scrap contract, unlike the London Metal Exchange's Turkish scrap contract that is cash settled.
While recent Chinese scrap exports was a dominant theme at BIR's convention this week, Chen noted that the use of steel scrap within China is on the rise, estimating that by 2020 China scrap reservoirs will amount to 200 million mt.
According to BIR figures, China used 90.1 million mt of ferrous scrap in steelmaking in 2016, the most in the world despite basic oxygen converters accounting for 94.8% of its steel production in 2016.
BIR ferrous division board members also noted that actual Chinese steel scrap consumption was likely much larger than the reported 90.1 million mt.
Any significant increase of homegrown scrap in China could lead to the emergence of a "cost advantage relative to iron ore," according to Chen who said SHFE will accelerate research and development of potential scrap futures.
Nathan Fruchter, founder of Idoru Trading, also addressed scrap futures.
"Had you told me 20 years ago that futures trading and hedging will be part of our day-to-day ferrous trading life, I would have told you 'no way, it's not happening,'" Fruchter said. "Well here we are 20-plus years later and the LME is offering futures trading for scrap. But people seem a bit hesitant to join the bandwagon, and I think it's a matter of being set in their ways, shying away from new thing. But I actually see a place in my business for this tool."
The LME contract settles against the Platts/TSI reference price for HMS 1&2 80:20 on a CFR Turkey basis.
"The LME futures prices for ferrous scrap are dependent on those physical contract prices," Fruchter said. "I see great opportunities for physical ferrous scrap traders who know how that market and its prices react."
