Comments on: Rethinking a quasi-hedge on AYSI

By: A few more BHP puts - Shadow Stocks

A few more BHP puts - Shadow Stocks — Thu, 18 Feb 2010 22:21:27 +0000

[...] BHP puts I mentioned in this post, “Rethinking a quasi-hedge on AYSI”, dropped to $2.45 today. So I bought a few [...]

By: BHP’s quarter - Shadow Stocks

BHP’s quarter - Shadow Stocks — Wed, 10 Feb 2010 23:23:07 +0000

[...] mentioned in a recent post that I had bought a few puts on BHP as a quasi-hedge against what I saw as the main exogenous risk [...]

By: Dave Pinsen

Dave Pinsen — Tue, 02 Feb 2010 05:28:12 +0000

There's been a recent twist in the annual iron ore contract negotiations, as the FT noted a couple of weeks ago.

By: geoffbrooks

geoffbrooks — Tue, 02 Feb 2010 04:54:33 +0000

Having posted that comment, I searched a bit on the relationship between steel prices and iron ore demand, and things appear not to be quite as straightforward as one might expect. The fact that such a large proportion of iron ore demand comes from China, and that China negotiates ore supply contracts as a single demand entity, can create interesting distortions. For example. as of Fall 2009, steel prices were rising because China could not agree with BHP, Rio Tinto and others on terms, and at least one commenter thought that might lead to increasing steel production and ore demand (http://www.talksteel.com/tag/iron-ore-talks/: “Steel spot prices both on the domestic and international markets are currently surging, driving up steel production and subsequently iron ore demand.”) Hard to see that lasting too long, so maybe the 6 – 8 month puts would not be affected too much.

By: geoffbrooks

geoffbrooks — Tue, 02 Feb 2010 04:33:31 +0000

One thing to consider is to what degree AYSI's product will be used by BHP in their non-iron ore operations. Given the diversity of BHP's operations, these puts may not track BHP's demand for Arcoplate if its use is confined to iron ore operations. If iron ore is the major demand segment, one possibility that occurred to me was to buy similar strike/expiration puts in the steel ETF SLX (EZN100220P00044000). The idea being that falling steel prices would be a leading indicator of falling iron ore demand.

By: Dave Pinsen

Dave Pinsen — Tue, 02 Feb 2010 03:07:23 +0000

And down 18% today.

By: Dave Pinsen

Dave Pinsen — Sat, 30 Jan 2010 11:09:08 +0000

That hedge was up 17.65% Friday.