Johnson: Turkish steel scrap takes a spotlight

The average recycling company has a number of commodity price risks that can easily be hedged – copper, aluminum, various other base and precious metals have liquid and decades-long histories of substantial derivatives trade that make hedging a common part of the day-to-day business of dealing in these metals.

Now with iron ore and various finished steel products becoming substantially more important as futures markets, it’s not surprising to see the LME’s contract for Turkish steel scrap taking a prominent role for recyclers in a fashion similar to LME aluminum or copper.

While Turkey’s status as a global benchmark for trade is hardly new, the developments we have seen this year in Turkish steel scrap futures contracts are broadening our understanding of the importance Turkey continues to have on the global ferrous markets.

Last year was a record year for LME scrap volumes with 8.19 million tonnes traded, nearly double the prior years 4.31 million tonnes. With this year tracking a possible breach of 10 million tonnes, we have to ask if there is any reason to believe Turkish scrap futures will NOT eventually follow iron ore as an actively traded benchmark for the ferrous scrap industry, rather than asking the old questions of whether this contract will have a material impact on the markets. The impact we can already see and it likely remains now just a matter of where volumes go from here.

April 2024 volume numbers are showing an all-time high month for trading, which the LME sees as driven in part by their only liquidity window but also by the ability to trade in larger clip sizes (of 5k tonnes or more). The daily volumes now exceed the size of a deep sea vessel, implying the ability to hedge bulk cargoes is quite a bit more feasible than it had been.

As Alberto Xodo with the LME confirmed, “With an average of over 60kt traded daily (equivalent to 1 and 1/2 deep sea vessels each day). Just a couple of years ago, a 5kt trade was a rarity, while today 5kt, 10kt, and even larger trades happen regularly.”

StoneX’s clients have seen the benefits of this development first hand, and the volatility in ferrous pricing seems likely to accelerate this development.

The importance here can’t be understated as the market for Turkish scrap is so geographically massive. The natural European audience is massive, but, as we know, U.S. exports off the east coast to Turkey are not minor. That’s why we see the long-term future as bright given the potential for both continents to see exposure to the same Turkish import price risks.

“Turkey is a major importer of steel scrap from the U.S., UK and Europe, and as such it is an important driver for the balance of demand and supply in these markets,” Xodo noted. “We see the strong connections between these markets reflected in the user base of the contract, with a number of leading recyclers in these regions actively using the LME steel scrap futures to manage their price risk.”

So far the contract has suffered through disruptions of trade flows in the Middle East but has not at all stumbled in its trade volumes, which likely shows the underlying need for it as a risk management tool for those dealing with substantial tonnes of exposure to obsolete scrap in these regions and the geopolitical uncertainties that can impact price.

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