•  The deal indicates a significant move forward for the industry which has not seen many such arrangements
  •  A US$600 million worth deal could mean nearly 1 million tonnes of steel to be supplied

Leading steel manufacturer JSW Steel Ltd. and Duferco S.A., a global steel trading firm, are reportedly in advanced talks for a cash-for-steel prepayment deal spanning five years. Sources familiar with the matter revealed that the agreement, worth around US$600 million, is anticipated to be signed in this quarter.

Swiss-based Duferco, which is backed by banks, would seemingly provide the cash to be repaid with physical steel. Sources further said that for Duferco, this deal would lock in future sales of steel with its clients, while JSW was seeking funds from alternate sources.

International Steel Trade Association (ISTA)’s Chairman, Jeff Kabel, mentioned that this deal would underscore an excellent move forward for the steel industry, which has not seen a lot of such arrangements to date.

Further from the sources, allowing sellers and buyers to lock in future prices, steel derivatives are still in a starting phase. This has made trade houses cautious when pre-paying for large tonnages, risking the movement prices against them in the future.

Deals like this are prevalent in commodities like oil, since hedging future sales are made possible by liquid derivatives markets. An agreement worth US$600 million would be equivalent to steel supply of around 1 million tonnes, the sources indicated.

Referring to the financing options adopted by steel companies that does not involve repayments in physical cargoes, Kabel commented that this deal is rather innovative. Most of the times steel companies pre-export finance and not in that huge a number, he added.

JSW purportedly plans on expanding its steelmaking capacity from 19 million tonnes currently to between 44 million tonnes and 45 million tonnes by 2030. In 2017, the company assigned US$1 billion for expansion and acquisitions, however, this year it had to proceed very carefully since the prices of steel has plummeted to the lowest in a year. It has further concerns that the upcycle might reverse