SMU Community Chat: Spencer Johnson talks futures and market volatility

SMU Managing Editor Michael Cowden sat down with StoneX futures broker Spencer Johnson on Wednesday. With many years formulating risk management strategies in the steel market, as well as being one of the longest serving members of the London Metal Exchange’s steel committee, Johnson gave a wide-ranging talk on a host of issues related to hedging and the steel futures markets in general. Here’s a snapshot of some of the topics he covered.

Of course, by its nature futures and hedging are granular topics with a lot of twists and turns. So, to truly dive in and appreciate the wealth of detail in the discussion, we invite you to listen to the full Community Chat here.

Growth in futures

Talking about the futures markets for steel, Johnson said a crucial change has been there being a useful electronic marketplace for these products.

“I think one of the most important developments for the markets now is the ability to just open up your phone and be able to trade HRC futures,” he said.

“Not really something that would have been viable when I first started selling the the concept of this to the service center industry about 15 years ago,” he added. “There was really no electronic market, there was very little market at all.”

Along those lines, he noted the growth of market participants.

“When I first started doing this in 2009, we’ve gone from unique market participant numbers of a couple dozen counterparties to now well over 500 unique counterparties that are trading HRC futures,” he said.

“And that number continues to grow, which is a good to see,” Johnson continued. “I think that it will continue to grow so long as there’s an underlying need for the product, and that that’s not probably going away.”

Nucor CSP

Johnson was asked if he thought the Nucor Consumer Spot Price (CSP) would limit the volatility of HRC prices. This was one of the goals stated when the Charlotte, N.C.-based steelmaker announced the CSP back in April.

Johnson had two things to say on this. First, he said the CSP “is helpful and useful for the market.”

“I think that the more data that you have about what’s happening in the spot market, especially the more reliable data, the better,” he said.

“It seemed like, at least initially, when they came out with their number, they were more willing to let that number rest closer to reality than mills had previously done with their sort of index assessments of the market,” Johnson said. “And so that was a bit revolutionary.”

As to whether the CSP would reduce volatility, though, Johnson was unsure, leaning more toward “probably not.”

The factors driving price volatility “aren’t really going away just because Nucor is telling us they have a settlement price they’re going to come out with every Monday,” he said.

Inherent volatility

Johnson said for that for HRC, there are also a lot of “wild card factors” to watch – whether that be potential changes to trade policy or increasing geopolitical tensions. Additionally, he noted there’s a substantial amount of volatility that gets priced into HRC because of big swings in raw material prices.

“I’m talking for iron ore costs, scrap costs, those things are volatile,” he said. “If those things are volatile, then the downstream product that’s created from them will be volatile.”

And there is little sign of volatility in raw material costs going away. Volatility has been ramping up since China decided to do away with annual iron ore contracts.

“So like basically, since the Great Recession,” Spencer said. “When I started doing this job in 2009, it became clear that there was never going to be any annual contract terms for inputs anymore for steel producers.”

Annual contracts had kept price changes for iron ore more moderate from year to year. But “those days are long gone. It’s hard to put the genie back in the bottle on long-term contracts,” he said.

And volatility has only been amplified in more recent years by factors as diverse as the initiation of Section 232 tariffs in 2018, the Covid-19 pandemic in 2020, and Russia’s full-scale invasion of Ukraine in 2022.

Hedging 101

Even in an hourlong discussion, it’s hard to scratch the surface of steel hedging strategies. If you, or someone in your company, would like to learn more, we invite you to attend SMU’s Hedging 101 workshop in Chicago on Saturday, Sept. 25. Find out more information and register here.