My presentation given at TSI's recent Istanbul seminar covering steel and scrap markets around the world, as well as the growth in derivatives markets.

1. TSI Steel and Scrap Seminar
Putting steel and scrap price
volatility in their place
Jarek Mlodziejewski
Istanbul
September 24, 2013

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3. Agenda
• Introduction to TSI and Methodology
• Ferrous risk management opportunities
• What are the contracts?
• What can I do with a contract?

4. Introduction
Specialist price information service
Impartial organisation
focused on compiling prices
for ferrous metal products
Data-driven methodology
Founded in in 2006 as
subsidiary of the Steel
Business Briefing (SBB)
Group
Acquired by Platts in July
2011
Continues to operate under
TSI brand as a separate unit
within Platts, part of
McGraw-Hill Financial
TSI operates from offices in London,
Singapore, Shanghai and Pittsburgh

5. TSI within Platts
Platts purchased TSI (and SBB) on July 1, 2011
TSI remains a separate operation within Platts
TSI team is distinct from Platts editorial and pricing teams
TSI continues compiling and developing its price indices using the
same data-driven, transaction-based methodology, under the TSI
brand
TSI data and index systems remain completely separate from Platts’
price assessment data and systems
Confidentiality of TSI’s Data Providers and their submissions
remains assured (no access for Platts’ editorial or pricing teams)
TSI’s subscription services and reports continue as distinct offerings
5

6. Coverage
Steel
Iron Ore
Scrap
 Hot rolled coil*
 Cold rolled coil
 HDG coil
 Plate
 Rebar
 Stainless
 62% Fe Fines*
 58% Fe Fines*
 63/63.5% Fe Fines*
 62% Fe (2% Al) Fines*
 65% Fe Fines*
Regions covered
Regions covered
Regions covered
Regions covered
 USA*
 Northern Europe*
 Southern Europe*
 Turkey
 Asia
 India (coming soon)
 Chinese imports*
 Turkish imports*
 USA
 Indian imports
 Taiwanese imports
 Australia*
* Daily Indices
Basis for cleared derivatives contracts
 HMS 1&2 (80:20)*
 Shredded
 A3
 P&S
Coking Coal
 Premium Hard
Coking Coal*
 Hard Coking Coal*

7. TSI Approach
Key principles:
– to maximise industry participation and the accuracy of data
submitted
– to minimise opportunities for manipulation and subjectivity in
the compilation of each index
TSI uses the same approach for compiling all its iron ore, steel, scrap
and coking coal reference prices:
– legal agreements with relevant Data Providers active in the
physical market
– secure confidential on-line data collection of actual transactions
– prices normalised to reference product specifications
– data ‘cleaned’ with outliers excluded
– volume-weighted averages calculated and published
/7

8. TSI Methodology
Data-driven methodology using
transaction data to calculate
volume-weighted price indices
TSI “Data Providers” submit spot
transaction data to TSI under
confidentiality agreement
Physical market participants only
(over 550 registered today)
Representatives from all relevant
points of the supply chain, buy and
sell sides
Submission direct to TSI database
through secure on-line channel
Data normalised and “cleaned”
before volume-weighted averages
calculated for the day or week

9. Agenda
• Introduction to TSI and Methodology
• Ferrous risk management opportunities
• What are the contracts?
• What can I do with a contract?

10. You can’t predict the future
But you could better prepare for it through hedging
$550
$500
$450
$400
$350
$300
CFR Turkey HM 1/2 80:20 US$/tonne

11. Do I have risk?
Yes, YOU HAVE RISK if:
You buy scrap on the international market
You buy semi/finished steel from Black sea mills
You sell steel products
Oh really; WHY, exactly do I have risk?
Because you are working on floating (not fixed) prices. In other words, you know your
costs, but not your margins (until sales time). Not having a full order book or not knowing
who will buy your steel is a risk. ‘If you are not hedging, you are speculating’.
Derivatives sound dangerous
They can be…so is a baseball bat, if used for the wrong purpose. Hedging, done
correctly, is conservative by nature. Leave speculation to other industries!
We’ve worked fine up till now
It’s been a ‘Goldilocks’ time: everything’s been just right. Especially exploding export
demand. But, is demand going to be so inelastic going forward? Fatalism. Is “some
month’s we’re up, some we’re down – it goes around” a sound foundation for a
business?

12. Price Risk / Missed Opportunities.
(Example for processor/exporters).
A forward contract entered into in January would have allowed an exporter moving
35,000t per month offshore to realise the red line, rather than the blue line.
A processor would have avoided about US$4 million in
revenue deterioration Jan - Sept
$420
$410
$400
$390
$380
$370
$360
$350
$340
$330
CFR Turkey HMS #1&2 80:20 US$/tonne
Forward Curve at Jan 4th 2013

13. Price Risk / Missed Opportunities.
(Example for mill/buyers).
A forward bought in June would have allowed a mill buying 35,000t per month to
realise the red line, rather than the blue line. Scrap would have cost this much less:
US$/t
A buyer may have saved close to US$2.5 million had they
have hedged at the bottom
420
410
400
390
380
370
360
350
340
330
CFR Turkey HMS #1&2 80:20 US$/tonne
Forward Curve at June 4th 2013

14. Opportunity to offer fixed price
contract to buyers, locking in
margins
$700
Fixed conversion cost for rebar. Offer product up to 2 years forward to buyers
$600
$500
Hypothetical FOB Turkey
Rebar
Fixed conversion cost + margin
(negotiated with buyers)
$400
$300
$200
$100
$0
Forward Curve HMS 1/2 80:20
CFR Turkey
Fixed raw material cost

15. Application of derivatives
Margin Management
• If your product output allows you to hedge and you do not, you are
speculating
• Derivatives allow you to lock-in a known for an unknown forward price
Fixed Pricing for your Customers
• Do you or your customers have a need for fixed pricing?
• Derivatives allow you to effectively lock-in a known price for your
forecasted raw material for several months or even years in into the future
Employing Market Insight
• Many of the early entrants to steel hedging have realised the benefits of
employing their knowledge in these markets
• Hedging provides considerable flexibility to your businesses
• In some cases the use of derivatives makes a considerable difference in
managing cash flow

16. How does a swap trade
work?
• An exchange in which the FIXED price is offset
against a FLOATING rate for a certain period
• Swaps are financially settled with the floating price
component usually referenced to a monthly,
quarterly, semi-annual or annual average of any
mutually agreed index
• The index in our sample case is the DAILY Heavy
Melt Scrap (HMS) 1 & 2, blended in an 80:20 Mix
Turkish imports CFR Iskenderun price

17. How does a swap trade
work?
– Steel rebar producer is asked by a good customer to offer a
FIXED first half 2013 price for 5000 tonnes a month of rebar
– The rebar producer needs about 5500 tonnes a month 80/20
scrap to cover this order
– The scrap industry typically does not offer fixed price
contracts
– However, the producer can go to the swaps market and a
broker will help find a counter-party to fix a 6 month
financial swaps contract

18. How does a swap trade
work?

19. How does a swap trade
work?
– The steel rebar producer calls her broker who is able to get a 6
month contract, average price US $350 and offers a fixed rebar
price of $550 to their customer adding the profit margin,
premium & other costs
– The six month Steel rebar FIXED offer of $550 and volume is
accepted by the steel billet customer
– The rebar producer BUYS 5500 tonnes a month from January to
June FIXED at $350 TSI steel scrap swap contract accepting to sell
it at a floating price (the average DAILY price assessments
published for that given month by the TSI)

20. How does a swap trade
work?
What happens if prices go DOWN?
– The rebar producer continues to procure their scrap
requirements as normal on the spot market.
– The Steel scrap pricing goes down starting in January
2013 and the TSI settlement average price for
January is US $300/tonne
– The steel rebar producer sells its 5500 tons of June TSI
contract swaps at US $300/ton with a US $50/tonne
hedge LOSS
– The rebar producer has bought physical steel scrap
for $50 per tonne LOWER
THE REBAR PRODUCER KEEPS ITS TARGET PROFIT MARGIN SECURED

21. How does a swap trade
work?
What happens if prices go UP?
– Steel scrap goes up starting in January 2013 and TSI
settlement average price for July is US $375/tonne
– The rebar producer sells its 5500 tons of July TSI steel scrap
contract swaps at US $375/ton with a US $25/tonne
hedge GAIN
– The rebar producer bought physical steel scrap for an
average price of US$375 for $25 per tonne “loss”.
THE REBAR PRODUCER KEEPS ITS TARGET PROFIT MARGIN SECURED

22. How does a swap trade
work?
Swap Buyer
Swap Seller
Broker
Clearing House

23. The Steel industry is facing up to
change, volumes on other contracts
are growing
Iron ore derivatives and futures markets have continued to grow very strongly in 2013
185 million tonnes cleared basis-TSI during January-August (2.6x higher than for the same
period in 2012)
Open interest also at record levels on the Singapore Exchange (SGX)
Futures contracts launched as market continues to develop/mature: CME, ICE and SGX have all
launched screen-traded IO futures since May 2013 to trade alongside derivatives
Trading continues to develop in other ferrous swaps contracts: including Turkish scrap imports
(TSI) and European HRC swaps (basis-TSI)
Iron Ore OTC Derivatives Contracts - Volume Cleared and OI (million tonnes)*
Iron Ore OTC Derivatives Contracts - Volume Cleared (million tonnes)*
80
2009
2010
2011
2012
2013
200
30
Options
70
Swaps
60
25
SGX Daily Open Interest (RHS)**
150
20
50
100
40
15
30
10
50
20
5
10
0
0
Q1
Q2
Q3
Q4
* SGX, CME Group, LCH.Clearnet, NOS Clearing and ICE
0
2009
2010
2011
2012
2013 (Jan-Aug)
* Total volume cleared by SGX, CME Group, LCH.Clearnet, NOS Clearing and ICE; Open interest for SGX only
** End of year

24. Further information:
Jarek Mlodziejewski
London
+44 207 176 7618
Tim Hard - hard@thesteelindex.com
Singapore
+65 6532 2800