Recycling is a booming industry even at the time when many other industrial sectors are finding it hard to survive. Precisely, recycling saves money, energy, environment and ultimately it helps the planet.
A major challenge the recycling industry now facing is the lack of a benchmark pricing system for the scrap metals. Base metals futures have global benchmarks in NYMEX and LME, what the recycling industry may be seeking something similar for the scrap metals too.
The futures contract will provide a sophisticated risk management instrument to the scrap suppliers to protect them from the price volatility of a market that is currently primarily spot- market driven.
A benchmark pricing system can standardize the scrap metal pricing around the globe and also organize the sector in an open global market.
The prospects for scrap metals futures trading may not look very positive: innovations such as steel billet futures and hot rolled coil futures at the LME and NYMEX is witnessing a surge in trade volumes and hence gives hopes to scrap metals futures.
The un-reliable and unorganised system of pricing which prevails in the scrap metals market is now creating serious trouble especially when trading between countries.
A fine tuned pricing system and futures trading at a prominent exchange like LME can ensure price discovery and hedging for industry players.
Investors and industrialists in the scrap metal trading could benefit from managing price risk through futures trading; furthermore it can create liquidity in the market.
The presence of a futures market for scrap metal will also offer a number of benefits to those at all stages of the supply chain, like producers, rerollers, merchants and end users.
Futures trading prices can add transparency to the system, it can also protect physical inventory against a fall in price. And such a system could help hedge physical purchases in times of production difficulty and can access the Exchange’s delivery mechanism as a source of material in times of extreme shortage, and as a channel to sell in times of surplus.
It won’t be a big deal to have a futures trading for scrap metals at LME as these scrap metals are linked to their underlying commodities and can be easily benchmarked.
Author: Truemon Thottathil
Date: September 2011