PHYSICAL TRADING AND RISK MANAGEMENT TOOLS
PHYSICAL TRADING AND RISK MANAGEMENT TOOLS
PHYSICAL TRADING AND RISK MANAGEMENT TOOLS
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<strong>PHYSICAL</strong> <strong>TRADING</strong> <strong>AND</strong> <strong>RISK</strong><br />
<strong>MANAGEMENT</strong> <strong>TOOLS</strong><br />
Robby Afnaim<br />
8 th Steel Success Strategies<br />
Metal Bulletin / World Steel Dynamics<br />
30 th November 2010 - London
RESOURCEFUL<br />
THINKING<br />
FROM A WORLD<br />
CLASS TEAM<br />
THE VALUE OF RONLY<br />
Founded in 1979 we’ve<br />
expanded into a global trading<br />
company dealing in<br />
metallurgical and agricultural<br />
commodities. We pride<br />
ourselves on offering a<br />
resourceful and professional<br />
service to major industrial<br />
companies.<br />
Our individual and personal<br />
approach delivers cost effective<br />
solutions and creates strong<br />
working relationships with our<br />
customers and suppliers.<br />
In addition to sourcing<br />
materials at the most<br />
competitive prices,<br />
thanks to our long-standing<br />
industrial relationships, we<br />
offer trade finance solutions<br />
and logistics support to<br />
manufacturing and trading<br />
companies across five<br />
continents.
PRODUCTS & OFFICES<br />
FERRO-<br />
ALLOYS<br />
PIG IRON<br />
COKE, COAL<br />
& IRON<br />
ORE<br />
STEEL<br />
NUTS<br />
LONDON<br />
ISTANBUL<br />
KIEV<br />
ODESSA<br />
BELO HORIZONTE<br />
ROTTERDAM<br />
DUBAI
THE SESSION<br />
LET BATTLE BEGIN<br />
VS.<br />
LET CHANGE BE EMBRACED<br />
4
BANKS VS STEEL MILLS:<br />
WHY THE CONFLICT?<br />
As physical traders, we accept that our business is risky<br />
but we can try to minimise some of that risk<br />
If hedging mechanisms exist, why not use them?<br />
Outside investors provide much-needed liquidity to the markets,<br />
and take some of the risk.<br />
5
PRICE MOVEMENTS IN<br />
2010<br />
1st Jan = 100<br />
160<br />
150<br />
140<br />
130<br />
120<br />
110<br />
Oil<br />
Gold<br />
Pig iron<br />
Scrap<br />
100<br />
90<br />
80<br />
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov<br />
Source: Bloomberg, Metal Bulletin, Ronly Research<br />
6
Nov 04<br />
Apr 05<br />
Sep 05<br />
Feb 06<br />
Jul 06<br />
Dec 06<br />
May 07<br />
Oct 07<br />
Mar 08<br />
Aug 08<br />
Jan 09<br />
Jun 09<br />
Nov 09<br />
Apr 10<br />
Sep 10<br />
Nov 04<br />
Apr 05<br />
Sep 05<br />
Feb 06<br />
Jul 06<br />
Dec 06<br />
May 07<br />
Oct 07<br />
Mar 08<br />
Aug 08<br />
Jan 09<br />
Jun 09<br />
Nov 09<br />
Apr 10<br />
Sep 10<br />
MONTH-ON-MONTH PRICE<br />
CHANGE (%)<br />
100<br />
80<br />
60<br />
40<br />
Exchange-Traded Commodities<br />
100<br />
80<br />
60<br />
40<br />
Non-Exchange-Traded Commodities<br />
20<br />
20<br />
0<br />
0<br />
-20<br />
-20<br />
-40<br />
-60<br />
-80<br />
Gold<br />
Aluminium<br />
Tin<br />
Palladium<br />
Silver<br />
Oil<br />
-40<br />
-60<br />
-80<br />
Uranium<br />
Moly<br />
Pig Iron<br />
HRC<br />
SiMn<br />
Scrap<br />
Source: Bloomberg, Metal Bulletin, Ronly Research<br />
7
COMMODITY PRICE<br />
VOLATILITY<br />
“Factors affecting the volatility of commodity prices have<br />
less to do with speculators, but appear largely global and<br />
macroeconomic in nature, due not only to the rapid<br />
economic growth of developing countries, but also<br />
monetary factors including money supply growth and<br />
exchange rate movements.”<br />
OECD-FAO Outlook 2010-2019<br />
June 2010<br />
8
WHY WERE FUTURES<br />
EXCHANGES CREATED?<br />
Futures exchanges were created to guard against volatility,<br />
not to inflame it.<br />
Originally created for agricultural products, due to<br />
uncertainty regarding harvest and weather.<br />
1710, Japan, Dojima Exchange, rice<br />
1850, USA, Chicago Exchange, corn & wheat<br />
1877, UK, LME, copper & tin<br />
2010, USA, NYSE Liffe, skimmed milk powder<br />
9
INVESTORS ONLY MAKE UP<br />
A SMALL PART OF THE<br />
COMMODITIES MARKETS<br />
Institutions invest $320 bn<br />
annually in all commodities<br />
Global oil market alone is<br />
worth $1,800 bn<br />
$320<br />
bn<br />
$1,800 bn<br />
Source: Barclays Capital, The Economist (13 Nov 2010) 10
OIL PRODUCERS VS STEEL<br />
PRODUCERS MARKET<br />
CAPITALISATION<br />
Exxon Mobil<br />
Royal Dutch Shell<br />
Oil<br />
producers<br />
Chevron<br />
BP<br />
ConocoPhilips<br />
Top 5 listed oil<br />
producers = combined<br />
market cap. of<br />
$948 bn<br />
Steel<br />
producers<br />
ArcelorMittal<br />
Posco<br />
Nippon<br />
JFE<br />
Tata<br />
Top 5 listed steel<br />
producers = combined<br />
market cap. of<br />
$143 bn<br />
0 50 100 150 200 250 300 350 400<br />
$ billion<br />
Source: Bloomberg, Ronly Research<br />
11
CASE STUDY - IRON<br />
ORE TRADE<br />
Mining co. sells<br />
to Ronly on<br />
quarterly<br />
contract<br />
Ronly assumes and<br />
mitigates risk<br />
Steel mill<br />
buys from<br />
Ronly on<br />
annual<br />
contract<br />
Iron ore swap
CASE STUDY - STEEL<br />
TRADE<br />
Ronly hedges<br />
the trade<br />
Ronly sells rebar<br />
to a stockist,<br />
with the price set<br />
at a time of their<br />
choosing<br />
LME billet<br />
contract
CONCLUSION<br />
1. Exchanges do not create volatility. Ultimately, it is<br />
demand/supply which moves prices<br />
2. Risk management tools allow for traders to<br />
undertake some trades which would otherwise be too<br />
risky.<br />
14
Thank You<br />
Robby Afnaim<br />
RONLY<br />
T +44 20 7258 2100<br />
E robby.afnaim@ronly.com<br />
I www.ronly.com<br />
15
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