Steel Voucher Exchange™ (SVE)

How it Works

Customer
• Place order with mill
• Detail the required specifications
• Accept any additional extras that the mill charges based on those specifications
• Negotiate delivery

Mill
• Ships order and invoices

• Accepts voucher (or cash) for base steel and cash for any extras
• Resells voucher on the Steel Voucher Exchange at then current spot price
• Receives market price for steel regardless of original voucher sales price

Example
• Customer needs a fixed price for 1,000 tons per month of HR for 2007
• Buys SVE vouchers for $600 per ton (current spot price)
• Places orders and negotiate prices and lead times as usual

Prices go up to $700
   • Customer takes delivery of steel invoiced at $700/ton
   • Voucher value has risen to $700 on the open market
   • Customer pays with a voucher and achieves their fixed price ($600).
   • SVE Mill puts the voucher back to the market for $700 (the current market price) and applies the cash against the invoice (keeping the original $600)

Prices go down to $500
   • Customer takes delivery of steel invoiced at $500/ton
   • Voucher value has dropped to $500 on the open market
   • Customer pays with a voucher and achieves their fixed price ($600).
   • SVE Mill puts the voucher back to the market for $500 (the current market price) and applies the cash against the invoice (keeping the original $600)

Net result
• Mill sells at spot price
• Customer buys at fixed price

Why it Works

Net result
• Mill sells at spot price
   • Existence of open receivables insures a floor price for vouchers since any drop below the highest open invoices will generate upward buying pressure
• Customer buys at fixed price
   • Vouchers may be purchased and held to lock in prices
   • Financial markets utilize vouchers as an underlying deliverable, thereby offering a full range of options and forwards to facilitate hedging

Steel Without
• Transportation
• Storage
• Deterioration

Accurately conveys
• Current value of base steel at given mill
• Differences in mill value due to:
   • Quality

   • Location
   • Reliability of Delivery
• Weighted average of base metal for generic steel

Provides
• Price storage mechanism
• Option underlying
• Price correlation
   • 100% correlation if buying from voucher mill.

Benefits
• No storage issues
• End user specifications for steel
• All mills can participate
• Market traded with daily pricing
• Electronic deliverable
• Worldwide distribution
• Market basket generic steel price

What is a Voucher?

A Steel Voucher is a prepaid coupon acceptable at the issuing mill in payment for a pound of base steel, including surcharges. Each producing mill defines base steel just as it always has done and negotiates extras for gage, width, quantity, chemistry, delivery, etc. which are paid for separately by the purchaser.

The US Post Office issued the Forever Stamp as a Voucher for First Class mail. Its value is determined by the current price of mail delivery. When postage went up to $.42 on May 12th so did the value of the stamp. It represents the delivery of one piece of First Class mail regardless of current postage rates, just as a Steel Voucher represents one pound of base steel, including surcharges, regardless of current prices.

 Examples

Click to see examples of hedging utilizing the

 Steel Voucher Forward Market

Futures

Click to download an excellent overview of the worldwide development of steel futures which includes a concise commentary on

 “The BFEX voucher solution”.

Voucher Background

Click to download

  What Vouchers Are And How They Work

American Metal Market's

 Guide to Steel Futures

Hedging Simulator

The LME steel hedging simulator can be accessed online at the following link: