LME still eyes steel futures

Staff -- Purchasing, 12/8/2005

London Metal Exchange (LME) officials still are investigating the possibility of a price risk management tool for six steel products. The exchange is seeking data from reference price compilers to work with the LME to create and publish specific steel reference prices. If, after a year, these prices have gained credibility within the steel industry and the LME membership, the nonferrous metals trading house may launch steel futures contracts. But, the exchange has decided to seek reference prices only hot-rolled sheet in coil in NAFTA (the North American Free Trade Agreement nations of Canada, the U.S. and Mexico), Europe and the Far East—and carbon steel billets in Turkey, NAFTA and the Far East.

Unlike nonferrous metals, carbon and stainless steel prices are not very transparent and vary by region, so there are several independent data-gathering groups in existence, including PURCHASING's Purchasingdata.com online data collection operation for the Midwest U.S. market. Also, steel industry executives in various regions have opposed steel futures for some time. Yet, Simon Heale, chief executive of the LME, continues to insist that "there is a clear demand for price risk management tools in the steel industry, and steel futures contracts are widely accepted as the solution.

The LME is the world's premier nonferrous metals market with spot and futures contracts for primary and secondary aluminum, copper, zinc, lead, tin and nickel traded and valued at $3.5 trillion annually. The LME turned over 72 million trades in 2004 with prices accepted universally even though there are other nonferrous exchanges in North America, Asia and elsewhere.

Conversely, reference prices for steel derived from physical or futures transactions never have been agreed up universally. It is clear that a physical contract as proposed by the LME would be difficult to achieve, partly because the material is subject to corrosion, therefore keeping stocks is an impossible task, says Peter M. Fish, managing director of the MEPS (International) Ltd. metal consultancy in Sheffield, England. "Moreover, the industry has a large number of product categories and dimensions that finding suitable products to monitor was and is very difficult."

And, contrary to public statements by Heale, the LME has never been seen by sellers and buyers in North America as the preferred exchange for the introduction of any such steel contracts. Note: The Dubai Gold and Commodities Exchange's chief executive, Framroze Pochara, told Arabian Gulf News in mid-November that it will launch the world's first exchange traded steel futures contract in the second quarter of 2006.