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					DGCX Steel Rebar
    Futures

         MEED Steel
       November 2007

             John A Short
Executive Director, Steel & Base Metals
     Agenda


 What is a Steel Rebar Futures
  contract
 Why trade Steel Futures
   Hedging
   Investing
   Financing
 Physical Specification & Delivery
 How to trade
        Disclaimer

Disclaimer


The information in this presentation is confidential and is intended for use
only by authorised recipients. It should not be reproduced or disclosed to
any other person without the prior written consent of Dubai Gold &
Commodities Centre (DGCX)

Authorised recipients of this presentation acknowledge that the material
in this presentation is copyrighted and may only use this material in
presentations and literature under the following conditions i) Any slide(s)
used must be reproduced without modification ii) DGCX must be
acknowledged as source of any material used in the body of any
document containing material from these presentations.

DGCX makes no representation or warranty (express or implied) of any
nature, nor does it accept any responsibility or liability of any kind, with
respect to the accuracy or completeness of the information in this
presentation
   DMCC & DGCX

 DMCC (www.dmcc.ae) an Authority of Dubai
  Government
    Mission to facilitate and enhance Dubai as a trading
     hub in physical and financial commodities
 DGCX (www.dgcx.ae) is the commodity futures
  exchange majority owned (51%) by DMCC
    Currently offers futures trading in gold, silver, fuel
     oil, and currencies, all introduced over the last 18
     months
    Steel Rebar Futures were launched October 29th
     2007. Rebar is the first of a suite of four DGCX
     contracts designed to serve the steel supply chain
    Further DGCX contracts include other metals,
     plastics, freight, and soft commodities
       John A Short
 Physical steel trader since mid 1980s
    Until 1991, Trader for Stemcor (London, E. Europe
     and India)
    GM of Stemcor Dubai 1991-2000
    MD of Stemcor Projects & Contracts, 1996-2000
 Since 2000, financial steel & base metals, and
  steel / ferrous strategy
    MBA from University of Oxford; Winner of the
     University’s New Business Development prize for
     thesis ‘Steel Futures’
    FSA Approved Broker (Base Metals)
    In 2001 established consultancy ‘Steel Derivatives’,
     serving the Steel Community, Commodity
     Exchanges, and Investment Banks:
        LME (2003)……………………DGCX (2006)
        Standard Bank (Global Head of Steel, 2004-2006)
        Duferco (Director of Strategy, 2006-2007)
What Are Futures ?
   Very similar to the Forwards contracts used to
    buy and sell steel today
       Import: You agree a price today, for delivery of a
        particular specification / volume of steel, 2-4
        months forward of today
       Local: You agree a price today, for delivery of a
        particular specification / volume of steel, today
        and/or during the days / weeks / months forward of
        today
   Primary difference with futures is that they are all
    standardized.
       Each ‘February Futures’ contract is the same.
       The seller of the February contract commits to
        make delivery of 10 mt of BS 4449 rebar, produced
        by an approved producer, in first week in February
       The buyer commits take delivery of that steel and
        pay for it (cash) on the delivery day
       A ‘March Futures’ is only different basis the delivery
        period is first week March. All other details are the
        same
 Futures vs Forwards
1.   As with money, and shares, its standardisation that
     provides the basis for exchange trading
2.   There is no counterparty financial risk, as your
     trading counterparty becomes HSBC/NBD. They
     guarantee financial settlement
3.   Closing out. Lets say you buy 5 ‘February Futures’
     in November. Then, at some point before first week
     in February, you decide to sell all 5 of them:
        The action of doing one thing (buy 5 Feb futures),
         then doing the exact opposite (sell 5 Feb futures) in
         effect cancels out the respective physical obligations:
            There is no residual obligation to take delivery 50 mt of
             BS 4449 rebar under the 5 ‘buy’ contracts, because that
             obligation has been cancelled by the obligation to make
             delivery of 50 mt under the 5 ‘sell’ contracts
            Thus no physical steel changes hands
        Closing out results in Cash Settlement, basis which no
         physical steel changes hands
  Cash Settlement
 The process of taking equal and opposite
  positions to ones previously taken results in
  cash settlement. So,
    If you bought at a lower price, and sold at a
     higher price, you profit from the difference.
    If you bought at a higher price, and sold at a
     lowerr price, you make a loss of the price
     difference.
    Conversely, if you sold 5 Feb Futures in
     November, and bought them back at a lower
     price in January, you profit from the difference.
    Buy them back at a higher price, you make a loss
 Basis cash settlement, no physical steel
  changes hands. Only cash changes hands.
  Cash Settlement
 Cash settlement is a key mechanism to
  grasp. Lets look at another example:
   On November 21st, buy 15 lots of February 2008
    futures. At any time before close of trading of
    those February futures contracts (18:00,
    February 7th 2008), sell back those 15 lots
   On December 17th, sell 25 lots of March 2008
    futures. At any time before close of trading of
    those March futures contracts (18:00, March 6th
    2008), buy back those 25 lots
 By taking an equal and opposite position
   Only cash has changed hands
   The respective obligations to make/take delivery
    of physical steel have been avoided as the party
    no longer has any ‘open position’. He has closed
    out his position
  Why Trade Steel
  Rebar Futures ?
 The buying and selling of DGCX Steel
  Rebar Futures should have 3 very distinct
  areas of interest
     Hedging
     Investing
     Financing
 During this presentation we will focus on
  Hedging and Investing
     Concepts
     Examples
 Further examples / explanations:
     DGCX Steel Rebar Futures brochure
     The Steel section of our website: www.dgcx.ae
       1. Hedging
   www.dgcx.ae has a series of HEDGING examples:
    1. Scrap-based Producer
    2. Virgin Iron (DRI or BOF) based producer
    3. Re-roller (billet based ‘producer’)
    4. International Trader
    5. Local Trader (local stockist)
    6. Contractor (or realtor / ultimate end user)
    7. Fabricator (cut & bend, epoxy etc)

When Hedging….
 All futures contracts are closed out; no rebar is
  delivered via the Exchange
 The physical product is supplied from the supplier
  to his customer in the standard manner. That
  physical product does not have to be DGCX
  specification BS 4449 rebar. Rather it could be any
  price-correlated steel: ASTM rebar, wire rod, or
  other price-correlated steel etc
      2. Investing
www.dgcx.ae has a series of        INVESTING examples
     Anyone can use futures for investing
     Those directly involved in the steel supply chain
      have a degree of ‘insider knowledge’; its
      perfectly legal to use it
     Sharia compliant – every contract commits the
      owner to make or take delivery of the underlying
      physical steel should the contract not be closed
      out prior to its expiry
     Unlike the region’s equity markets, you can go
       Long = buy now to sell later, if you think prices
        will rise. Buy low, sell high = Profit
       Short = sell now to buy back later, if you think
        prices will fall. Sell high, buy low = Profit
     3. Financing
The financing benefits of futures:
   Inventory financing
    Market of last resort
       To deliver to, or take delivery from
    Cash flow management
    Tax management
    Potential to lower cost of capital
       Material response to the Basel II banking
        accord / directive for Credit Risk Assessment
       International banks now
       Local banks from 1.1.08
       Fully enforced on all UAE banks from 1.1.11
 Where Do Futures
Prices Come From ?
   Stock Market: A share’s price / value is the
    equilibrium of supply and demand; the
    equilibrium of people’s opinion of what that
    share is worth
     50% of people think its worth more
     50% of people think its worth less

   Futures Market: The price / value of a Rebar
    Futures Contract is determined in the same
    way
       The price on the screen is the equilibrium of
        people’s opinion today of what BS 4449 Rebar
        will be worth – will be physically bought and sold
        for – in (the first week of) each quoted month,
        basis FCA (truck) Jebel Ali, customs cleared but
        duty unpaid
  Price Discovery
 What factors effect what 10 mt of rebar will be worth in
 30 / 60 / 90 days time ?
  Cost of carry: the costs of storage, insurance,
     money (exchange rates; interest rates), people etc
  Local, regional, & international market fundamentals
            Prices in Rebar, Billet, Scrap, Iron Ore, Wire Rod etc
            Transport: Freight / Trucking Rates
            Construction demand / supply
       Exchange Rates, particularly the Dollar
       Sentiment – what’s your view ?


               Month            Sep Oct Nov Dec Jan Feb
Sept   4th     US$/mt           628 635 643 645 634 609


               Month            Nov Dec Jan Feb           Mar Apr
Nov    5th
               US$/mt           588 595 605 618           622 626
Principles of Hedging
 To mitigate the risk of physical market prices moving
  against you by taking equal and offsetting position in the
  futures market to that taken in the physical market.
 The desired effect is to balance the risks on both sides

 If you buy steel now, to sell it later, simultaneously
  you should sell (the same value of) steel futures
  now, and buy them back later.
 Should prices fall:
     You lose money in physical steel (buy high, sell low = loss)
     You gain money in steel futures (sell high, buy low = profit)
 Should prices rise:
     You make money in physical steel (buy low, sell high = profit)
     You lose money in steel futures (buy high, sell low = loss)

Key principle #1: The ability to sell short, ie sell futures you
don’t yet own. You are selling a commitment you will deliver
Steel, which you later close out.
Principles of Hedging
Similarly:
 If you sell steel now, knowing you have to buy
  steel later to fulfill your sale commitment, you
  should simultaneously buy (the same value of)
  steel futures now, to sell them back later.
 Should prices fall:
     You make money in physical steel (sell high, buy low =
      profit)
     You lose money in steel futures (buy high, sell low = loss)
 Should prices rise:
     You lose money in physical steel (sell low, buy high = loss)
     You make money in steel futures (buy low, sell high =
      profit)

Key principle #2: there is no perfect hedge; one that wholly
eradicates steel price risk. Rather, the following scenarios are
designed to illustrate the principles that can be used by many
participants of the steel supply chain to greatly reduce price
risk in their day to day business.
Principles of Hedging
Key principle #3: Price Correlation.
 The price risk you are seeking to mitigate does not
  have to be in 16,20,25 & 32 mm BS 4449 Rebar in
  Dubai
    8, 12 & 40 mm is price correlated
    ASTM rebar is price correlated
    Certain product markets of billet, merchant bar, wire rod
     are price correlated
    Rebar in Abu Dhabi is price correlated with no time lag
    Rebar throughout the GCCC is price correlated, albeit with
     variable time lags
    So are certain rebar and other long product steel markets
     in East Africa, northern Middle East, Iran, SE Asia

 Hedgers should be looking for an 80% or more price
  correlation between their specific steel price risk and
  Dubai rebar price
          Price Correlation
                                                         Steel Rebar Prices

          650   Correlations to Blended Rebar Price
                  MeSteel 99.38%
                  SBB 97.03%
          600     MBR 99.40%


          550


          500
US$/Ton




          450


          400


          350


          300
                                                                                              CFR Dubai - MeSteel
                                                                                              CFR Gulf States - SBB
          250
                                                                                              CFR Persian Gulf - MBR
                                                                                              Blended Rebar Price*
          200
            Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07
                Source: MeSteel, Steel Business Briefing & Metal Bulletin Research
                * Average of Rebar Prices of MeSteel, MBR & SBB (Dubai/PersianGulf)
          Price Correlation
                                                     Rebar Price Correlations
    650
            360 days Correlation to Blended Rebar Price*
            CIS Billet CFR Dubai       90% (2007) MeSteel
    600
            WireRod CFR Dubai          93% (2006) Metal Bulletin
            Rebar      CFR EastAsia 88% (2006) SBB
    550     Billet     CFR EastAsia 84% (2006) SBB

    500


    450
US$/Ton




    400


    350


    300

                                                                         — Correlations to Blended Rebar Price*
    250                                                                  — CIS Billet CFR Dubai (MeSteel) 97.77%
                                                                         — CIS Billet FOB BlackSea (Metal Bulletin) 97.22%
    200                                                                  — WireRod CFR Dubai (MeSteel) 96.34%
                                                                         — Rebar CFR EastAsia (SBB) 92.48%
                                                                         — Billet CFR EastAsia (SBB) 94.54%
    150
       Sep-02   Jan-03   May-03   Sep-03    Jan-04   May-04   Sep-04    Jan-05   May-05   Sep-05   Jan-06   May-06   Sep-06   Jan-07   May-07
          * Average of Rebar Prices of MeSteel, MBR & SBB (Dubai/Persian Gulf)
     Agenda


 What is a Steel Rebar Futures contract
 Why trade Steel Futures
   Hedging
   Investing
   Financing
 Physical Specification & Delivery
 How to trade
Inventory Hedge

 This example could apply to any market
  participant in the rebar supply chain with
  unsold inventory and worried about falling
  market prices.
 The participant might be:
   A scrap-based producer holding 5,000 mt of
    unsold scrap and/or billet and/or rebar
   A re-roller holding 3,200 mt of unsold billet
    and/or rebar
   An iron ore-based, or HBI-based, producer
    sitting on 1,800 mt of unsold inventory of raw
    materials and/or billet and/or rebar
   An international trader with 1,500 mt unsold
    from a larger pre-purchase of billet and/or rebar
    now ready
   A local stockist with 600 mt of rebar inbound, or
    in stock.
Inventory Hedge
Scrap Based Producer
Its all about market view….

What if
 Our scrap-based producer is sitting on 5,000 mt of unsold
  scrap inventory
 Apart form isolated examples, the markets - scrap, billet,
  rebar – are showing signs of deteriorating, both price and
  demand (tonnage)
 And contrary to market forecasts / opinion, our producer
  thinks prices will worsen even further

Hedge
 Locates (one or more) customers for 5000 mt of rebar for
  September arrival. The customers won’t open LCs
  because market looks like declining. But they are willing
  to commit purchases at market prices prevailing on
  arrival……
 The producer uses steel futures market to establish
  hedge against the declining prices
  Jun 5th         Month             Jul Aug Sep Oct Nov Dec
                  US$/mt            623 625 611 605 600 595
             Futures Market                                Physical Market
Must do equal and off-setting, so               Has scrap in stock, so mill has bought
should sell September futures                   (ie is long) in physical purchased at
                                                $380
Sells 500 lots of Sept @ $611
                                                Bought 5,000 mt of inputs @ $380


  Aug 31st        Month             Sep Oct Nov Dec Jan Feb
                  US$/mt            566 570 574 578 582 586
Again, should do equal and offsetting           Now must SELL the rebar produced
in futures market to what he does in            from the scrap, and does so at
physical, so he should BUY futures              prevailing physical market price

Buys 500 lots of Sep @ $566                     Sells 5000 mt of rebar @ $566


No residual obligation to make or take          Theoretical ‘loss’ of $45 (due selling at
delivery. Financial profit $45                  $566 not $611) due to falling market
Net return is ($45+ $566) $611; the Jun 5th price for September Rebar Futures on DGCX
  Jun 5th        Month              Jul Aug Sep Oct Nov Dec
                 US$/mt             623 625 611 605 600 595
             Futures Market                           Physical Market
Must do equal and off-setting, so          Has scrap in stock, so mill has bought
should sell September futures              (ie is long) in physical purchased at
                                           $380
Sells 500 lots of Sept @ $611
                                           Bought 5,000 mt of inputs @ $380


  Aug 31st       Month              Sep Oct Nov Dec Jan Feb
                 US$/mt             686 690 694 698 702 706
Again, should do equal and offsetting      SELLs rebar produced from the scrap,
in futures market to what he does in       and does so at the prevailing physical
physical, so he should BUY futures         market price

Buy 500 lots of Sep @ $686                 Sells 500 mt of rebar @ $686


No residual obligation to make or          $686 return much better than
take delivery. Financial loss $75          expected; ‘windfall’ profit of $75
Net return is ($686 - $75) $611; the Jun 5th price for September Rebar Future
   Inventory Hedge
 The market viewed prices were declining,
  but producer feared an even worse scenario
 The hedge
    Was assured of physical raw material supply (at
     June’s prevailing market price – US$ 380 mt)
    Was protected against unduly unfavourable
     movements in price (relieving pressure on
     conversion margin for the ‘hedged’ tonnage)
    And, whilst theoretically producer missed on
     benefiting from favourable movements in price
     (when prices did not weaken but in fact
     increased), producer was hedged against the
     ‘unpalatable’ scenario of declining prices
 Risk of a negative price return was exchanged
  for certainty of known return (nominal profit).
Contractors Hedge
More complex scenario
 Again, its June 5th
 Contractor is required to offer a fixed price for
  500mt per month, July-December, ie total 3000 mt
 Suppliers will only offer upto 2 months forward
    May think prices will rise
    May not have concluded their input prices

Hedge: Sale Side
 Using the DGCX steel rebar futures prices, the
  contractor calculates the average price of buying 50
  lots of steel futures contracts each month
 Quotes this price as a fixed price for physical rebar
  to his customer
 If his price is accepted he must then immediately
  buy 50 steel futures for each month (6x50 lots) at
  the average price of July-December
Contractors Hedge
Hedge: Procurement Side
 Negotiates to pay his physical rebar supplier the
  prevailing monthly market price for 6x500 mt,
  July-December when it is delivered to him
 As each month’s steel futures contract approaches
  expiry, our contractor
    Buys 500 mt of physical steel, at then-prevailing
     market prices. He supplies that steel to the
     construction site at the fixed price he agreed back
     on June 5th
    Simultaneously, when he buys the physical steel
     each month, he sells the 50 steel futures contracts
     for the corresponding month

 Unlike the producer, the contractor enters the
  futures market as a buyer (goes long futures), as
  he commences his physical market transaction
  short (has sold physical steel he doesn’t yet own)
   Jun 5th
                  Month             Jul Aug Sep Oct Nov Dec
                  US$/mt            623 627 631 635 639 643
              Futures Market                                  Physical Market
BUYS 50 lots for each month at prevailing         Agrees SALE of 500 mt each month
futures levels, so $623, $627, $631 etc           at average of July-December prices

Buys 6x50 lots, Jul-Dec av. @ $633                Sells 6x500 mt, Jul-Dec, @ $633




   Nov 30th       Month             Dec Jan Feb Mar Apr May
                  US$/mt            686 690 694 698 702 706

Each month, when he buys physical steel,          On the last day of each month, has
he takes equal and offsetting position in         to BUY the physical steel at the then
futures, ie SELLS back 50 lots at the then        prevailing market prices
prevailing market prices

Sells 6x50 lots Jul-Dec av. @ $674                Buys 6x500 mt of rebar @ $674
No residual obligation to make or take            6-month cost overrun of $41 due rising
delivery. Financial profit $41                    market
Net cost is ($674 - $41) $633; the Jun 5th average prices for Jul-Dec Rebar Futures
   Contractor’s Hedge

Hedged the price of rebar supply and rebar sale
1. Gave fixed price to end buyer (realtor) for physical
   tonnage, based on purchasing physical steel at average of
   DGCX futures prices for each month (July – December)
2. Didn’t matter what scrap, billet or rebar market prices did
   June-December
3. Was able remove the price risk of unknown forward rebar
   procurement prices vs fixed rebar sales prices
    Protected against unfavourable movements in price
    Exchanged the possibility of ‘windfall’ profit from favourable
     movements in price for the certainty of supply.
4. He could focus his energies on servicing his client via his
   contracting skills, and not gambling the job’s success on
   steel prices
    Risk of negative price return exchanged for
        certainty of known profitable return
 Presence of Investors
 and Hedgers in DGCX
For hedging to work, there has to be
    Convergence of the rebar price in the futures market
     and the physical market price (see later)
    Liquidity
 Those seeking to hedge their price risk need to
  appreciate the importance of liquidity provided by
  those trading on DGCX for investment purposes.
 Generally, it is those investors (speculators) that
  provide the liquidity to buy the steel risk that the
  steel trade wishes to off-load when hedging
Think of Car Insurance (or indeed any insurance)
 When buying insurance, you are actually paying the
  insurance company to take away your risk
 The insurance company is speculating that you will
  not claim on your insurance
 Without speculators, you would have no insurance
 Presence of Investors
 and Hedgers in DGCX
 When hedging your steel price risk, you are paying
  for speculators to take that risk – the risk that
  prices may move against you – away
 Without investors (speculators) seeking to buy that
  risk (with a view to profiting from it), Exchange’s
  would rarely reach the critical mass liquidity needed
  for hedging to function successfully
    There needs to be a buyer when you want to sell
    There needs to be a seller when you want to buy
The liquidity provided by Investors (speculators)
is the liquidity sort by Hedgers
 And it is because of liquidity that the cost of
  hedging (as we shall see later) is, in % terms, far
  less than the cost of car insurance
    The cost of hedging can be measured in US$ cents mt
    Investing with
       Futures
   Investing with steel futures is essentially the same as
    going long (pre purchase) or short (pre-sale) in
    physical steel. However, when using steel futures
       The leverage opportunities are vastly superior
       The costs and risks are very much lower

   If an investor thinks (share / currency / commodity)
    prices will increase over the coming months, the
    investor buys now, and seeks to re-sell them at a
    higher price some time later
       Buy low / sell high; profit from the difference

   The beauty of using futures is that you can sell short to
    make a profit. In other words, if a price fall is
    anticipated, the investor sells futures now, and seeks
    to buy them back at a lower price later
       Sell high / buy low; profit from the difference

   If I had $150,000 and thought rebar prices were
    rising…… Buy rebar or rebar futures ?
  Jun 5th
                   Month             Jul Aug Sep Oct Nov Dec
                   US$/mt            623 627 631 635 639 643
               Futures Market                                 Physical Market
BUYS 50 lots for each month at prevailing          Has view that prices will rise over
futures levels, so $623, $627, $631 etc            the summer. Has $150,000, the
                                                   source of supply, and customers
Buys 3x50 lots, Jul-Sep av. @ $627
                                                   I do not buy physical steel



   Aug 31st        Month                 Sep Oct Nov Dec Jan Feb
                   US$/mt                686 690 694 698 702 706
Each month SELLS back 50 lots at the
then prevailing market prices

Sells 3x50 lots Jul-Sep, av. @ $678

No residual obligation to make or take
delivery. Financial profit $51
            Cost is (2 x $0.2 x 1500) $600, and gross profit is ($51x1500) $76,500
    Leverage: $150,000 bought $940,500 of futures (150 x $627 x 10mt); 50% return
Investing with Futures
   Risk vs Reward
 Whether buying or selling futures, your initial outlay is only 10-
  15% of the future’s prevailing value, not the 100% common in
  physical steel
 The price risk is the same, but investing with futures incurs
  none of the costs nor risks of producing, importing, finding a
  credit worthy counterparty, getting paid, possible contract
  renegotiation, storage / freight / insurance / administration
 Transactions costs are fixed at a maximum US$ 0.20 mt, but
  DGCX has waived all transaction fees for the first 12 months
     Brokerage and clearing fees are negligible
 Simplicity: effect trade execution on screen in seconds
 Investing with futures is an ideal way to leverage ‘insider’
  knowledge for greater returns
     And its perfectly legal (and Sharia compliant)
 You can profit from of the market moving in either direction.
     With shares, you only make money when share prices rise.
 Take profits daily
   Jun 5th
                     Month            Jul Aug Sep Oct Nov Dec
                     US$/mt           623 627 631 635 639 643
                Futures Market                                  Physical Market
Trader is convinced prices will fall during
the summer


Sells 50 lots of Oct @ $635



   Sep 30th          Month               Oct Nov Dec Jan Feb Mar
                     US$/mt              516 520 524 528 532 536
BUY back October futures

Buy 50 lots of Oct @ $516


No residual obligation to make or take
delivery. Financial profit $119
             Cost is (2 x $0.2 x 500) $200, and gross profit is ($119x500) $59,500

       Leverage: $50,000 sold $317,500 of futures (50 x $635 x 10mt); 120% return
     Agenda


 What is a Steel Rebar Futures
  contract
 Why trade Steel Futures
   Hedging
   Investing
   Financing
 Physical Specification & Delivery
 How to trade
  Delivery of Steel
   Rebar Futures
 Exchanges that employ a delivery mechanism do
  so such that market participants have choice to
  make or take delivery of physical product via
    The futures market, or
    The traditional physical market
 Why ? To drive price convergence between the
  price of rebar futures and physical rebar for the
  delivery in the next days
 Lets say its November 25th, and December’s rebar
  futures contract, which calls for delivery of
  physical rebar first week of December, is trading
  at $ 650 mt
 Yet one seems to be able to locate the same spec
  rebar in the physical market at $ 620 mt
Price Convergence /
 Delivery Arbitrage
 What would sellers do ?
    Withdraw offers for sale in the physical market,
     and seek to sell at $650 in the futures market.
 What would buyers do ?
    Withdraw offers to buy in the futures market, and
     seek to buy in the physical market at $620

 Futures Market: Lack of demand / excess supply,
  drives prices downwards
 Physical Market: Lack of supply /excess demand,
  drives prices upwards
This process is called Delivery Arbitrage

 Result: Prices for (first week) December delivery
  of rebar via (i) the futures market and (ii) the
  physical market converge

Delivery Arbitrage drives Price Convergence
 DGCX Steel Rebar
   Specification
Grade   BS 4449 (1997) W 460 B Type 2
         No deviation to chemical, mechanical or physical
          conditions, tolerances nor testing procedures
         Specification 100% in accordance with BS 4449
         Producer has choice of tempcor or micro-alloying
          techniques (vanadium) as per BS 4449

MTC      Copy of MTC to be supplied for every heat in
          every bundle (ie minimum of 1 MTC per lot)
         Must tally with MTC samples deposited with
          DGCX
         Must evidence full compliance with BS 4449
          requirements of MTCs, with full traceability
         Must tally with delivered rebar (heat #s etc)
Marks    Bar pattern / logo in compliance with BS 4449,
          duly repeated no less than once per 1.5 metres
 DGCX Steel Rebar
       Approved Rebar
Confirmed
GCCC         Sabic Steel
             Qatar Steel   (C.A.R.E.S. Approved)
             Al Ittefaq    (C.A.R.E.S. Approved)
             ESI           (C.A.R.E.S. Approved)
Turkish      Ekinciler     (C.A.R.E.S. Approved)
             IDC           (C.A.R.E.S. Approved)
             Kroman        (C.A.R.E.S. Approved)
             Diler         (C.A.R.E.S. Approved)
             Habas         (C.A.R.E.S. Approved)

Also Invited
Turkish  Icdas             (C.A.R.E.S. Approved)
         Colakoglu         (C.A.R.E.S. Approved)
         Kaptan            (C.A.R.E.S. Approved)
 DGCX Steel Rebar
      Approved Rebar
What about other Producers ?
 Other GCCC eg Rahji, Sohar, Nasser ?
 Others eg Estfahan, Shagang, Amsteel, Ezz ?

Key Requirements
 The local physical market trades their BS 4449 steel
  at market prices, or a moderate premium to it
    If product is traded at a discount, that discount cannot
     be substantial (ie cannot be price distorting)
 Once the local market ‘accepts’ the source (by
  trading it at similar market prices to existing
  Approved Rebar) then DGCX will commence
  Approval Process by inviting that producer to apply
    Strict approval criteria demands ongoing compliance
 DGCX regards C.A.R.E.S. approval very highly
 Price Convergence
  / The Underlying
The physical product (‘underlying’)
traded via a Futures Market has to be
 What Buyers and Sellers are readily
  able to price
 What >90% of Sellers are readily
  able to locate at market prices
   150,000 - 200,000 mt of Approved
    Producer’s rebar in the Exchange-listed
    diameters is distributed in the UAE
    every month
   There is usually 30-45 days stock in the
    market
   Price Convergence
    / The Underlying
The physical product (‘underlying’) traded via a Futures
Market has to be
 What >90% of Buyers are readily able to accept at
  market prices, and trades at market prices
 It might not be exactly what buyers want (eg
  diameters) or where they want it (Jebel Ali)
 If buyer’s are wary they may not get (i) what they
  want, or (ii) what they think a particularly fussy
  client may not accept, then price convergence means
  they should either:
    Take the cash from selling their futures contract and
     use it to buy the physical steel that their particular
     client wants from the physical market, or
    Take the physical deliverable product from their futures
     contract and trade it in the physical market for the
     actual product they / their client wants
  Delivery Arbitrage /
   Physical Delivery
 When prices are convergent between the physical
  and futures markets for delivery next week, few
  Buyers and Sellers will use futures contracts to take
  or make delivery of rebar. Why ?
    They may not deal in physical steel in the UAE
    Costs to make / take delivery via the exchange
     are moderately (0.5-1.0%) more than in the
     physical market; financial rewards to make / take
     delivery via the exchange are nearly always worse
    The Exchange’s delivery mechanism is very strict
     / unforgiving
    No brand premiums, nor support of relationships
    Buyers won’t know which of the 4 diameters
     (16,20,25,32 mm) they will get, they will have to
     collect it from JAFZA on the specified day, and
     they will have to pay for it that day
 Delivery Arbitrage /
  Physical Delivery
 However, some Buyers and Sellers
  will use futures contracts to take or
  make delivery the underlying physical
  product. Why ?
   They take on the role of providing
    delivery arbitrage
   There is an asset collateralization
    function
 Exchange delivery is the
    ‘delivery of last resort’
         Review
 Futures prices are the equilibrium of peoples opinion
  of what price physical rebar will trade at in the future
 Prices are discovered by trading contracts that are
  commitments to make / take delivery of physical
  rebar
 Hedging: Equal and offsetting action in the futures
  market to balance the price risk you have in the
  physical market
    Physical rebar supply chain unaltered !
 Investing: Use ‘insider’ steel market knowledge to
  make leveraged profits from rising (buy to sell) or
  falling (sell to buy) markets
 Delivery: Purely a tool to drive price convergence.
    Make or take delivery via the Exchange only if it is
     financially advantageous to do so.
    If prices are convergent, the wise trader will always
     make / take delivery via the traditional physical market
    Market Access
 Via a Broker / Clearer
      DGCX has 170 brokers, some of which are broker / clearers,
      Broker fees are negligible, and negotiable
      Broker may give / rent you a screen
      Nominal set up costs
      You must establish clearing account
 Via Trade Membership
    Costs $ 10,000 (one off fee) to trade all steel contracts
     DGCX may introduce on proprietary basis
         Entitles you to your own screen and training
         You enter orders directly in real time with no brokerage fees
    Other contract families (eg Precious; Currencies) have
     different trade membership costs ($20-30,000)
    You must still establish clearing account
 Via Broker Membership
    Costs $ 150,000 (one off fee) to trade all DGCX contracts,
     for yourself or as a broker, entering all trades directly
    You must still establish clearing account
           Margin

 In financial markets, ‘margin’ are payments made
  reflecting the daily price movement of a futures
  contract away from the initial transaction price
 Lets say a steel future was sold at $650
    If the next day its worth $648, then the owner must
     pay $2
    If the day after that its worth $651, then the owner
     receives $3
 The $2 and $3 are ‘Margin payments’
    Daily credit and debits
    Means market participants are never exposed to more
     than 1 days price fluctuation




But who pays who, and how ?
 Margin  Clearing

 Daily flow of margin is between
    DGCX’s clearing banks (HSBC, NBD), and
    DGCX clearing members, representing themselves
     and/or their trading clients
 Thus, to trade on DGCX, all participants must
    Self clear, or
    Hold margin (clearing) accounts with a Clearing
     Member who handles daily margin transactions
       If you are in debt, your Clearing Members pays the
        Clearing House on your behalf.
       If you are in credit, your Clearing Member receives
        your money from the Clearing House on your behalf.
 Prominent clearers of DGCX
    Mashreq, Fimat, Man Financial (MF Global), NBD,
     JP Morgan, StanChart
      Liquidity
 The concept of exchange Liquidity commands that
    When you want to sell futures, there is a buyer
    When you want to buy futures, there is a seller
 ‘Critical Mass’ liquidity is a concept of when there
  are always enough buyers and sellers to ‘take the
  other side’, and that their presence is sufficient in
  number not to ‘move the market’ unduly
 Liquidity can be measured in various forms
    The amount of lots traded per day
    The amount of open interest
    The breadth of the bid-offer spread
        Narrow spreads (a few US$) indicating greater liquidity
    The trade in the active months eg spot and CFR (90
     days) markets vs trade in less active months
   Liquidity
 Initially, when futures contracts trade
     Spot market is for smaller volumes, most often its for 1-20
      lots, reflective of physical market transaction volumes
     The 90 day market tends to attract larger transaction volumes,
      reflective of the physical market, but is unlikely (at contract
      launch) that the 90 day contract will be be sufficiently liquid to
      handle typical CFR trades of 10-20k mt
     Trade in other months tends to be less active (less liquid)
 Offers to buy or sell larger volumes crystallizes the
  fundamentals of supply and demand.
     Large orders to sell lower market prices
     Large orders to buy raise market prices
 To offset lower levels of liquidity (at start-up), single order
  transaction size is limited to 1000 mt (ie 100 lots)
     Multiple orders are, of course, accepted.
  Order Placement

 All trades, even for 1 or 2 lots, will set a
  new price
 It follows that trades for larger volumes
  tend to be done in series
   50 lots sold in five trades of 15,6,12,7, and 10,
   Could be at upto 5 different price levels during a
    day, with market dropping and perhaps
    rebounding during the period.
 You can dictate how you (or your broker)
  should buy and sell your volume
   Order Placement

 Market Order: Instruction to buy/sell immediately at
  best available price
 Limit Order: Instruction to buy/sell at a specific price
 Stop Loss Order: Instruction to buy/sell if the market
  trades at the set trigger price
 Day Orders: Lasts until close of trading that day
 End of Session Orders (EOS): Lasts until close of a
  trading session
 Good Til Date (GTD): Stays active until executed,
  otherwise it expires on the stated date
 Good Til Canceled (GTC): Stays active until executed,
  otherwise expires when the futures contract expires
 Immediate Order (IOC): Has to be executed
  immediately the market reaches that price/volume,
  after which any portion not executed is cancelled
       Features of DGCX
          & Liquidity
 Respect liquidity / illiquidity
     Commence your trading in modest volumes
     Do not expect to be able to hedge all your business on day 1;
      Capacity to hedge will grow with liquidity
 But do not be afraid of illiquidity
     Some of the most attractive markets to trade in are new
      markets, particularly for those with a true understanding of
      the underlying physical product market
     Hedge funds will not enter DGCX Rebar Futures whilst there is
      illiquidity
 The fees Brokers charge are really quite small vs the
  advice and experience they can offer you
 Respect Exchange Rules and Regulation
     The DGCX market is exceedingly well regulated (ESCA /
      IOSCO)
     Rules are in place to ensure smooth running of trading
     The technology is very user friendly
              Costs
 Clearing
    Like establishing any bank account, there will be set
     up fees and transactions fees.
    Negotiate the fees with your Bank
 Broker
    Gives trading advice, education, and execution
     services, for which they command transactions fees,
     likely to be measured in cents per tonne
 Trading lines
    Banks may offer you credit to trade (up to a limit)
 DGCX
    Provides the trading platform, and offers expert
     training to members and their clients. More than 2000
     have passed through DGCX training
    Has waived its $0.20 mt transaction fee for 12 months
              Trading

Underlying Asset •10 mt of BS 4449 (1997) W 460 B Type 2
                   •16,20,25,32 mm
                   •DGCX Approved Producer
Price Basis        US$ per mt, Customs Cleared, Duty
                   Unpaid, FCA (truck) in Approved Delivery
                   Point, Jebel Ali
Contracts          Monthly (start up 4, then  6  12  24)
                   Weekly for first 13 weeks in the New Year
Trading Hours      1000 – 1800 hrs, Monday-Thursday
Last Trading Day First Thursday of Delivery Month.
Matching           Those holding open positions at 18:00 on
                   day of expiry undergo random allocation
                   that evening. Matched Buyers & Sellers
                   advised 06:00 Friday
Delivery Period    Unless effecting ADP, matched Buyers &
                   Sellers obligated to make / take delivery
                   the four Trading Days following the last
                   day of trading [next Monday-Thursday]
Thank You

  Q&A
For further information

   www.dgcx.ae

john.short@dmcc.ae
  +971 4 361 1616

john.short@dgcx.ae
 +971 4 390 3899

				
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