Memo to: Prospective Steel Benchmark Price Opinion Providers From:

Mogami-Y

Description

Memo to: Prospective Steel Benchmark Price Opinion Providers

From: Peter F. Marcus, Managing Partner, World Steel Dynamics
Bob Jones, Editor in Chief, Metal Bulletin
Martin Abbott, Publisher, Metal Bulletin and American Metal Market

TMRe: SteelBenchmarker Proposal

Date: March 13, 2006



Dear WSD and MB/AMM subscribers and friends:

World Steel Dynamics and Metal Bulletin/American Metal Market have pooled their resources
to jointly create and sustain a global steel benchmark pricing system we call the
TMSteelBenchmarker . We expect that our steel benchmark prices:

• By the end of 2006 will be trusted by steel buyers and sellers the world over.
Those involved in the steel market will find the benchmark prices to be accurate,
timely and indispensable, in some cases, when settling physical contracts. The
benchmark prices will be believable in part because they are the same products as the
generic ones discussed day in and day out by buyers and sellers when they are
“discovering” the price in effect that day.

• Starting in late 2006 or 2007 will become the underpinning for an extraordinary
surge in the trading of financial instruments that permit the hedging of the steel
price risk. Steel financial transactions – i.e., those with no physical delivery – will
occur on an exchange such as the Chicago Mercantile Exchange (CME), London
Metal Exchange (LME), the New York Mercantile Exchange (NYMEX) and on an ...

Sujets

• Pri?evac
• Linternaute.com
• Web Services Description Language
• Ammann
• Transaction informatique
• Tonne d'équivalent pétrole

Informations

• Publié par: Nufeng
• Nombre de lectures: 50
• Langue: English

Extrait

Memo to: Prospective Steel Benchmark Price Opinion Providers From:Peter F. Marcus, Managing Partner, World Steel Dynamics  Bob Jones, Editor in Chief, Metal Bulletin Martin Abbott, Publisher, Metal Bulletin and American Metal Market TM Re:SteelBenchmarkerProposal Date: March 13, 2006 Dear WSD and MB/AMM subscribers and friends: World Steel DynamicsandMetal Bulletin/American Metal Markethave pooled their resources to jointly create and sustain a global steel benchmark pricing system we call the TM SteelBenchmarkerexpect that our steel benchmark prices:. We •By the end of 2006 will betrusted by steel buyers and sellers the world over. Those involved in the steel market will find the benchmark prices to be accurate, timely and indispensable, in some cases, when settling physical contracts. The benchmark prices will be believable in part because they are thesame products as the generic ones discussed day in and day out by buyers and sellerswhen they are “discovering” the price in effect that day. •Starting in late 2006 or 2007 will become theunderpinning for an extraordinary surge in the trading of financial instrumentsthat permit the hedging of the steel price risk. Steel financial transactions – i.e., those with no physical delivery – will occur on an exchange such as the Chicago Mercantile Exchange (CME), London Metal Exchange (LME), the New York Mercantile Exchange (NYMEX) and on an “over-the-counter” non-exchange basis (by firms that offer this service). Key thought: “If you want to predict the future, invent it.” This document, which supplements our December 2005 preliminary draft proposal to you, is designed to be a complete proposal. Along with the accompanying operations manual, it contains sufficient information for you to decide whether or not your company will become a twice-per-month opinion provider to our new steel benchmark pricing system. If your answer TM is “yes,” we hope that you become aSteelBenchmarkerprice opinion provider by returning the “Participation Agreement” in Appendix A and by registering at http://www.steelbenchmarker.com.

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This memorandum contains: TM •A listing of the attributes of theSteelBenchmarkersystem is designedsystem. The to be, among other things, accurate, robust, confidential, profitable, auditable and timely. •An “Operations Manual” that includes a description of the system, indicates how it is constructed and outlines the steps we will take to insure that the benchmark prices are trustworthy. It details the step-by-step procedures and code of conduct we intend to follow. Our processes and procedures will be audited regularly by an outside fiduciary, such as an accounting firm with experience in financial risk procedures and regulation. TM •Big and small picture reasons why theSteelBenchmarkersystem, if widely supported by the steel industry and a leading futures exchange, should add to the profits of steel mills, steel middlemen companies and steel buyers. •Why widespread financial settling of steel contracts, should it occur, would leapfrog the steel industry into the epicenter of the global information revolution. Such a development would provide winning opportunities for well-positioned steel mills, steel traders, steel service centers, steel scrap processors and large and small steel buyers. •Legal opinions that indicate why our system should not be in violation of USA and EU antitrust and competition law standards. See Appendix B attached. •The agreement (Appendix A) to be executed between the providers and World Steel Dynamics and Metal Bulletin/American Metal Market – – either on-line or off-line. After this document is reviewed by a variety of groups in your company, we hope to count TM you among theSteelBenchmarkerprice opinion providers. As noted above, you can register by logging in athttp://www.steelbenchmarker.com. Steel benchmark prices TM SteelBenchmarkeris planning, twice each month, to publish steel benchmark prices for hot- rolled band, cold-rolled coil, rebar and standard plate in the following regions: the United States (east of the Mississippi), Western Europe, mainland China (Shanghai and Beijing) and the world export market. In addition, we will publish a benchmark price for shredded steel scrap in the United States.

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The price opinion inputs for the benchmark prices, we plan, within a year will be based on the information received from more than 1,000 providers. The number of price opinion inputs may exceed 2,000, with some providers submitting a single price opinion and others perhaps up to 10.

Hot-rolled band Cold-rolled coil Standard plate Rebar Scrap (USA only) Total

TM SteelBenchmarker Targeted Price Inputs (bi-monthly price opinions)

Steel Mill 70 70 30 100 -- 270

Steel Trader 140 140 100 120 15 515

Steel Service Center / Processor 80 60 80 80 25 325

Steel User 250 250 150 150 15 815

Total  540  520  360  450  55

 1,925

Note: We plan to have 17 benchmarks: HRB, CRC, plate and rebar in four regions (4 x 4 = 16)  and shredded scrap in the USA = 17 in total.  Regions include: USA, W. Europe, China and the World export market.  Many providing companies will be supplying multiple inputs. If the growth of financially settled steel futures contracts on the exchanges follows the evolution of some other metals and commodities, more than 20 times the one billion tonnes of steel produced in the world each year could be transacted on futures exchanges – i.e., about 20 billion tonnes. Assuming that size of each steel or scrap contract is 20 tonnes, there could be 1 billion of financially settled steel contracts per year. The steel industry, we believe, has more favorable characteristics to support a huge volume of financially settled contracts than some other metals and commodities. We reach this conclusion after considering that: a) the steel industry is vast (about $700 billion of transactions value when taking into account raw material purchases and steel product sales); b) the increased need to hedge the steel price risk in recent years due to the increased volatility of steel prices; c) the host of high-volume ubiquitous steel products including our benchmark selections – for example, hot-rolled band, cold-rolled coil, standard plate, rebar and steel scrap have combined deliveries of about 1 billion tonnes per year; d) variations in the price of the benchmark steel products from region to region will be of great importance to those who buy and sell steel (and also to outside investors in the industry); and e) the “spreads” between the steel benchmark prices will also attract huge interest.(Note: The greater the trading activity, the greater the liquidity for those who are hedging the steel price risk – which stimulates even more transactions.)

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Financially traded steel futures a plus? Our answer is “yes.” Our analysis indicates that substantial activity in financially settled steel contracts on a global basis would be a “win-win-win.” By that, we mean a win for steel mills, a win for middleman companies (traders and steel service centers) and a win for small and large steel buyers. Ways to win include the: a) possible sizable cost efficiencies in the production and distribution of steel products as more transactions are effected on a higher or more steady volume basis; b) engaging in hedging transactions that reduce the volatility of steel prices; c) a rise in the enterprise value of some of the steel companies that are viewed to be well positioned on a longer-term basis; and d) the opportunity to smooth out profits over the cycle by engaging in forward steel price hedging.(Note: Financial investors might also benefit from financial settled steel contracts since they would be able to go long or short the common stock of a steel company and the steel products it is producing.) Let’s consider the impact of financially traded steel futures contracts from a big picture point of view for regular and extraordinary transactions: •A regular transaction is one in which “normal” buying and selling practices occur. However, if the benchmark pricing system, via the mechanism of the trading of financially settled steel contracts, gives more buyers and sellers the ability to offer more customers a more stable price on a longer-term basis, this may lead to: a) a better buyer/seller relationship; b) gains in market share for those who benefit from selling more product on a fixed price basis; c) opportunities for both sellers and buyers to examine jointly the profitability of each transaction; and d) lower costs due to efficiencies as the contracts are regularized. •An extraordinary transaction is one in which pricing anomalies are present – as in steel shortages.  During shortages, the surge in steel prices and the unusual price spreads between steel products create huge profit opportunities for many of the players. Of course, a shortage is a “short” age that may occur only once a decade, if that.  In the world of financially settled steel futures, even when there isn’t a shortage (as at present), there will still often be some pricing anomalies (sizable variations in steel product prices and in the spreads between steel product prices) that can be financially hedged in a way to benefit the steel mill, the middleman company, the steel user and/or the financial investor. Here’s a current example: In January 2006, the spot hot-rolled band price is $600 per metric tonne in the United States, $500 per tonne in the EU, $330-420 per tonne on the world export market and $290 per tonne in China. On balance, we think that pricing anomalies in steel products offer profit opportunities for those in a position to invest in steel futures.

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WSD and MB/AMM believe that, once financial steel price hedging becomes widespread,the steel industry will be propelled into the epicenterof the information revolutioninformation revolution, as we know, is. The transforming the global economy – as was the case for the industrial revolution th that began in England in the 18 century. The information revolution is discovering pockets of unused capacity, promoting gains in labor productivity, stimulating capital outlays, improving product quality, upgrading customer service and dampening inflation. In this new world, steel company managements that are highly skilled in perceiving the new forces, and benefiting from the opportunities created, have the best chance of winning. Winning companies, besides being most esteemed by financial analysts, will be able to influence their competitive landscape in beneficial ways. Let’s next consider the profit situation from thesmaller picture – the individual firm –point of view: • Steel mills. Relationships with customers may become less confrontational as more pricing arrangements are based on steel benchmark prices (after adjustments for premiums and discounts). Transactions should tend to include more tonnes over a longer period of time. The steel mills at times will have the opportunity to hedge forward steel prices, and/or to buy scrap, via financially settled contracts, on a highly favorable basis. Steel companies perceived by investors to be winners in the new environment may benefit from higher enterprise values. • Steel middlemenability to hedge the steel price risk – especially in today’s. The highly volatile steel price environment – will be “transformational” for this group. The fear that most worries the owners of these middleman companies – i.e., debilitating losses if steel prices move the wrong way – will be greatly lessened. Enterprise valuations of the companies may rise substantially. Market share will increase if customers can be offered the opportunity to purchase steel on a steady price basis and the transaction with the middleman is backed up with a supply arrangement with a leading steel mill.(Note: Middleman companies include steel traders, steel processors, steel service centers and steel scrap processors.) • Steel users. If the cost to procure steel is less volatile, steel users that make steel- intensive products will have more security in pricing their final products. Rebar fabricators will be able to bid on one-year contracts with considerably less risk. Steel buyers that manufacture steel-intensive products may have higher profits since they will less frequently be impacted by unexpected steel price increases.

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TM Attributes of theSteelBenchmarkersystem We are structuring the steel benchmark pricing system to be:

•Accuratesteel products for which we ask the providers to give their price. The opinions are the benchmark (or generic) ones that are used day in and day out, when buyers and sellers are seeking to “discover” the base market price for the commodity in question.

•Robustgoal is have at least 25 to 50 inputs for each product category. . Our After outliers have been removed statistically, the benchmark price will be the average of the remaining inputs.

•Well-definedthe home markets, the price opinion is the booking price, ex-works. For (FOB mill), for nearest-term delivery for commodity-grade product for the mid-sized buyer. For the export market, it is the price opinion of the average price, for nearby and distant customers, FOB the port of export. For shredded steel scrap the price opinion is for the USA, east of the Mississippi, delivered to the steel plant.

•Available. All price opinion providers will be e-mailed the steel benchmark price results at the same time they are released. Non-providers may subscribe to receive the benchmark price release.

•Auditableoutside fiduciary will regularly audit, on an unannounced basis, the. An processes and procedures used by WSD and MB/AMM to create and maintain the steel benchmark pricing system.

•Confidentialprovider will submit its price opinions to a secure offsite computer. The that converts the identity of each price opinion provider to a coded number. No person will ever connect a price input to the name of the provider. The distribution of price inputs by product – not the names – will be seen only by the statistician at the fiduciary who will be checking that the benchmark prices are being calculated properly.

•Easy sign uplog onto a third-party website, where they register: a) the. Providers products for which they will be providing a price opinion; and b) the e-mail identities of the primary contact at the provider and two back-up contacts.

•Fall back procedure. Procedures will be set in place to publish the steel benchmark prices and take corrective actions if there are unexpected problems.

•Expandabletheory, we can add to the number of product categories and/or the. In countries/regions for which they are generated.

•Soonand MB/AMM hope to publish the first benchmark prices in April 2006.. WSD

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•Statistical. There will be a sufficient number of price opinion inputs, and a statistical method to remove the outliers, that the reported results should be valid statistically. We will attempt to remove as much “noise” as possible when the price benchmarks are calculated.

•Frequentsteel benchmark prices will be issued on the second and fourth. The Wednesday mornings of each month, with the providers’ inputs due the second and fourth Monday of each month.

•Supportable. Selected WSD and MB/AMM staff members, who will have access to the names of the companies and the products for which they are providing the price opinions, will communicate with the opinion providers as necessary.(Note: The WSD and MB/AMM staff members will never see any specific price input, nor the distribution of inputs.)

•Legal& Burling, a law firm well known for its expertise in regulated. Covington industries and antitrust matters, has issued letters from its Washington and Brussels TM offices that theSteelBenchmarkersystem in its current form is not violating antitrust and competition laws.

•Opportunisticsteel industry will be entering a new world in which new. The relationships will give astute managements the opportunity to enhance the competitive position of their company.

•Efficient. Reliable steel benchmarks will produce a revolution in futures trading in steel, producing efficiencies in the manufacture and distribution of steel which will enhance profits for producers, middlemen and purchasers, while lowering the cost of end products to the ultimate consumer.

•Insightful. When considering the host of forces that are impacting the steel industry, and that these will be reflected in changes in the steel benchmark prices, we think that the price developments for the individual products will provide a good insight into possible future industry trends. (Note: WSD and MB/AMM plan to issue a report the second and fourth Fridays of each month that discusses the implications of the benchmark price results.)

•Liquid. The steel benchmark prices might support a massive volume of trading in financially settled steel futures on and off the exchanges. Such a development would provide steel buyers and sellers, and others, with the opportunity to take sizable positions and, if they wish, to change their minds and shift the positions when desired.

•Transformational. WSD and MB/AMM believe that widespread hedging of the steel price risk, via financial transactions on and off of the exchanges, will be a transforming event for the global steel industry. It will bring the industry dead center into the information revolution.

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World Steel Dynamics and Metal Bulletin/American Metal Market World Steel DynamicsandMetal Bulletin/American Metal Marketare well-established firms that can be counted on to provide services to the steel industry on a long-term basis. The firms know one another quite well, having been equal partners in promoting the “Steel Success Strategies” conferences since 1986. In 2005, about 1,150 people attended the conference in New York in June and 350 in London in December. Metal Bulletin/American Metal Market has a common stock market value of more than $260 million. It has a staff of 200 supporting its Metal Bulletin and American Metal Market publications and its Metal Bulletin Research efforts. MB/AMM have offices in Chicago, London, Los Angeles, New York, Philadelphia, Pittsburgh, Rio de Janeiro, Singapore, Sydney and, in a month, Shanghai, China. Staff members speak all the major languages including Russian and Chinese. World Steel Dynamics was started in the research department at PaineWebber Inc. in 1975. It became an independent corporation in 1999. In 2005, it generated more than $4 million of revenues. It has a staff of eight, plus a representative in China. A member of the staff in New Jersey is Liu Jinghai, Director of Chinese Research, who formerly directed the Chinese Metallurgical Information Center in Beijing. WSD has close contacts with the top executives at steel companies the world over. WSD and MB/AMM will be engaged in a joint marketing effort to bolster the number of TM providers to theSteelBenchmarkerwill be an advertising campaign, ongoing. There discussions with possible providers and direct contacts with possible providers during our conferences. Both WSD and MB/AMM will have individuals assigned to interact with price opinion providers (although, they will never see any price opinion that is given by any provider nor during any discussions with WSD and MB/AMM employees will there be any reference, or hints, about the price opinion that the provider has e-mailed).

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What’s the next step for your company? World Steel Dynamics and Metal Bulletin/American Metal Market respectfully suggest that you: TM •Discuss internally theSteelBenchmarkersystem – including our request that your company become a price opinion provider. •Show our proposal to your legal counsel. •Let WSD and MB/AMM know of your interest in participating and your views. Your e-mails should be sent to [e-mail] or [e-mail]. •Register your company as a price opinion provider at http://www.steelbenchmarker.comand by submitting the attached Participation Agreement in Appendix A. World Steel DynamicsandMetal Bulletin/American Metal Marketthank you for your TM consideration of ourSteelBenchmarkerlook forward to discussing oursystem. We proposal with you in greater detail.

Peter F. Marcus Managing Partner World Steel Dynamics

Tel: [phone] [e-mail]

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Martin Abbott Publisher Metal Bulletin/ American Metal Market Tel: [phone] [e-mail]

Appendix A SteelBenchmarker™ Participation Agreement

TM The purpose of theSteelBenchmarkeris to provide a reliable set of benchmark prices for use by participants in the steel industry and others without requiring disclosure of actual transaction prices. To assure reliability and prevent misuse, World Steel Dynamics (WSD) and Metal Bulletin (MB)/American Metal Market (AMM) agree that participants will provide their price opinion inputs to an independent third party computer system and not directly to WSD and MB/AMM, and that no person or group outside of the third- party computer system operator will ever be able to connect a price input to a specific provider. Moreover, no person or group, except for a third-party statistician that is monitoring the computer system, will ever see the product-by-product distribution of the price inputs. TM TheSteelBenchmarkeroutput will consist of objectively calculated averages of price opinion input. So that the input data will be as reliable and confidential as possible, as a TM condition to its participation as a data provider toSteelBenchmarkereach participant agrees to the following: 1. The data provided by the participant will NOT be actual prices, but, instead, the participant will provide an estimate, based on the participant’s best judgment, as to what the going spot market booking price of certain quantities of specified products would be to a mid-sized buyer as of the time indicated in a specified geographic market for a hypothetical standardized market transaction. 2. The participant will NOT discuss or disclose its input, including how the reported benchmark price varied from its input, with or to any other provider of TM SteelBenchmarkerinput or anyone else, and, in particular, the participant will NOT discuss or disclose its input with or to any competitor or any employee of WSD and MB/AMM. 3. The participant will not disclose to anyone outside its own operation that it is a TM provider of input to theSteelBenchmarker, what the nature of its input is or what products or geographic markets that input encompasses. TM 4. The participant will not provide the third-party collector ofSteelBenchmarker input with any information that would permit identification of suppliers, customers, products, prices, dates or quantities of actual transactions.

Participating company name

Signature Date

World Steel Dynamics DateMarch 16, 2006

Metal Bulletin/AMM DateMarch 16, 2006

Note: E-mail to: [e-mail] to: [phone] 10

Appendix B Covington & Burling, one of the leading law firms in the United States with a specialty TM in regulation and antitrust matters, is of the opinion that theSteelBenchmarkershould not run afoul of antitrust and other competition laws in the United States and Europe. The following extracts highlight Covington & Burling’s opinions. Please refer to the Operations Manual for the complete opinion. For the USA they determined: “This responds to your request for Covington & Burling’s opinion as to whether World Steel Dynamics’ (WSD) proposed global benchmark steel price system TM (SteelBenchmarker), as described to us in the attached proposal, complies with United States federal antitrust standards. For the reasons set out below, it is our opinion that, as TM so-described, the proposedSteelBenchmarkerbenchmark steel pricing system does comply with U.S. federal antitrust standards.” TM  “Because the intended purpose of theSteelBenchmarkersystem is procompetitive, because its structure, input, output and other safeguards make collusion or other misuse of the information to be collected and generated highly unlikely, and because this data collection and benchmark publication activity would take place in an unconcentrated and highly competitive market, we are of the opinion that the TM SteelBenchmarkerproposal, as described to us by WSD, does not violate current U.S. antitrust standards.” For the European Community they determined: “This letter responds to your request for Covington & Burling’s opinion as to whether World Steel Dynamics’s (“WSD”) proposed global benchmark steel price TM system (SteelBenchmarker), as described to us in the attached proposal, complies with European Community (“EC”) competition law. For the reasons set out below, it is our TM opinion that, as so-described, the proposedSteelBenchmarkerbenchmark pricing system does comply with EC competition law.” “In combination with the unconcentrated nature of the world steel industry, the TM fact thatSteelBenchmarkerwill collect and disseminate pricing opinions rather than TM actual transactional data, and the aggregated nature ofSteelBenchmarkerreports, these logistical safeguards provide strong assurance that the proposed information exchange TM will not harm competition. Accordingly, it is our opinion that theSteelBenchmarker proposal, as described to us by WSD, is unlikely to fall within the scope of Article 81(1) and, therefore, would be compatible with EC competition law.”

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