LONDON, April 29, 2020 /PRNewswire/ -- Continued steel price volatility has led to wider adoption of CME Group's HRC futures contract. Yet due to volatility in the difference between specific sheet products prices, producers, processors and users of HDG coil products have been unable to fully manage their risks or take advantage of what the futures market has offered.
This CRU Insight looks at details behind the CME Group's new steel futures product and why producers, processors and consumers of HDG coil can benefit by using this tool.
HDG coil steel futures will help with price risk
The CME Group recently launched a new steel futures contract which follows the U.S. hot-dipped galvanised (HDG) coil market. The U.S. Midwest Domestic Steel Premium (CRU) Futures is financially settled against the difference between U.S. Midwest hot-dipped galvanized coil (base) steel (HDG base) and hot-rolled coil steel (HRC). By offering this Premium futures contract, CME Group is expanding its product offering in the U.S. ferrous space, which includes the established U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index Futures contract.
Since October 2008, the CME Group has used CRU's market leading U.S. Midwest HRC index to settle their HRC futures contract. Market adoption of the HRC futures contract has been strong, particularly as steel price volatility remains high and volumes and open interest reached record levels in March this year. However, due to this increased volatility, the premium of HDG coil over HRC prices has also widened, leaving market participants in a risky position if they only using HRC to hedge their exposure to HDG coil products. Indeed, if a market participant were to hedge their HDG coil exposure using only HR coil, any change in the premium of HDG coil over HRC prices is an added risk that may eliminate any benefit from their hedge.
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