Corporate History
Birmingham Futures Incorporated (formally Birmingham Futures Exchange Incorporated - BFEX) was formed in 2003 by 25-year steel veteran Jonathan C. Putman, its Chairman and CEO. Having been responsible for the purchase of millions of tons of steel in an environment of rapidly changing steel prices, Putman came to realize that U.S. manufacturers could not compete without a reasonable way to tie down the critical cost of steel for an extended period of time. In 2002, hot-rolled steel prices increased 90% in only 7 months and had more than tripled by September 2004. This history of violent price fluctuation has devastated both steel producers and steel consumers alike. It has been a lose-lose situation and America’s manufacturing base has paid the price. Of the 2.7 million jobs the U.S. economy lost between early 2001 and mid-2003, 2.4 million were in manufacturing.
Other metals, most notably aluminum, successfully addressed this issue through the creation of a futures market. There were three major reasons that the steel industry could not use their model. Birmingham Futures Exchange was designed to provide a steel price hedging venue for its members to deal with these three stumbling blocks.
The requirement to warehouse steel to support a contract makes it economically unfeasible to have a futures market in steel. The cost of both transportation and storage of thousands of tons of steel, relative to the very low margins available on the material, simply overwhelms the value of the transaction. In addition, the almost unlimited combinations of chemistry, physical and structural properties, surface requirements, and dimensional specifications of both gage and width, make the task of having the suitable steel in the appropriate warehouse almost impossible. Add to that the fact that the steel rusts in storage and age hardens, it is just not a viable option.
Physical Delivery
BFEX transactions are designed to settle for cash only, without any potential for physical delivery. The counterparties negotiate the desired public index to value their individual transaction, thereby saving themselves the prohibitive costs of physical delivery. The cash settlement is simply used by the parties to offset the cost of continuing to provide the actual material as they have always done.
The utilization of a futures exchange for price hedging has been the traditional instrument for hedging price exposure in the non-ferrous metals marketplace. The absence of a viable steel futures contract at this time leaves the industry exposed to unacceptable risk.
Steel Price Swaps
BFEX offers the possibility of hedging price exposure through the use of over the counter (OTC) price swaps. This is accomplished by entering into a swap agreement with a counterparty for some future time frame. Both parties agree to a fixed reference price (the strike price) and pay each other the difference between the strike price and the market price at some point in the future. The net result is that each party offsets its existing market risk with a financial risk that moves in an equal but opposite direction. This effectively eliminates the risk of market price fluctuations to the bottom line.
Counterparty Credit
BFEX allows each party to a transaction to evaluate the credit worthiness of the proposed counterparty according to their own individual credit risk assessment policies. BFEX facilitates this process by utilizing financial intermediaries to insure the highest level of credit worthiness.
Membership in BFEX requires payment of an annual fee. All members have access to the online BFEX Trading Room for monitoring negotiated open offers, counter offers, and contracts. Trading members are limited to Eligible Contract Participants as defined by the Commodity Futures Trading Commission (Steel related businesses with a net worth exceeding $1,000,000 or certain regulated entities).