The LME has researched publicly available price correlations on CIS, Turkey billet (Mediterranean contract), rebar and scrap, which all suggest a high level of price correlation over a ten year period. Publicly available figures also suggest a similar level of correlation can be found in the LME Far East contract. This level of correlation suggests that it would be possible for producers to hedge scrap purchases against the LME benchmark billet contract. The potential for such price-risk hedging creates the ability to offer fixed-price contracts to customers.
In specific relation to rebar, the ability to hedge price risk will enable rerollers to offer long term fixed-price contracts to customers in the construction industry, which could create an opportunity to tender for long term construction projects well beyond the current three month model.
“Of course we intend to use the LME billet futures contract to hedge our billet prices…the steel sector operates overwhelmingly on spot basis… this results in a more volatile market and increases the risks of companies. Futures trading will help the sector to normalise in that sense.”
Ugur Dalbeler, General Manager, Çolakoglu, Turkey President, IREPAS Source: Metal Bulletin
Rebar pricing structure
The diagram opposite illustrates the ability to price rebar using the LME steel billet price as a benchmark.
The sales price for rebar is made up of the LME benchmark price, plus any conversion costs, premiums and the profit required. In the diagram, various costs and producer premiums have been included. However, any of these can be removed, or others added at the discretion of the rebar producer. Profit has also been included.
Other than the discovery of the benchmark price, the LME has no involvement in any of these calculations.
Rebar pricing structure
