LONDON (Reuters) – The metals trading world will train its eyes on the Middle East on June 27, when the Dubai commodities exchange launches the first internationally tradeable steel futures contracts.
If trading does begin as planned it would represent a coup for Dubai in getting its product to market ahead of larger rivals the London Metal Exchange (LME), New York Mercantile Exchange and Shanghai Futures Exchange.
The Dubai Gold and Commodities Exchange believes there is an appetite for a transparent benchmark price such as exists for the oil, base metals and soft commodities markets, even though some of the biggest names in world steel have already voiced opposition to the idea.
But when it comes to powerful banks in the metals markets, the response is more positive.
“We have had interest about steel futures from the same types of guys that play the metals market, such as hedge funds and mutual funds,” Michael Widmer, analyst at French investment bank Calyon said.
Among the banks that trade at the London Metal Exchange who responded to a Reuters survey, the overall reaction to steel futures was favorable though none had yet hired any staff specifically to trade steel.
Bankers say it’s not just hedge funds who are keen.
“We have had broad interest expressed from the whole client spectrum, hedge funds to proprietary traders,” said Fabian Somerville-Cotton, Head of Listed Products at Dresdner Kleinwort.
“There is a general enthusiasm for steel futures,” he says. “The successful contract should be able to engage both hedgers and speculators.”
It is partly the role of those speculators and the risk that their influence may reduce steelmakers’ power to set prices for their own products, that turns steel firms such as the world’s biggest producer Arcelor Mittal and Germany’s ThyssenKrupp.
Another problem is that steel comes in different shapes and types.
Whereas other exchange-traded metals like copper or tin are chemically identical, steel differs hugely depending on where it was made, the proportion of iron, carbon and other elements that go into it, and the shape in which it leaves the production line.
So while LME-grade copper in a warehouse in Singapore is directly interchangeable with metal in New Orleans, meaning the LME’s numbers do represent a global price, steel markets are much more regional.
“The big issue is that steel — contrary to what some believe — is not a globalize product,” says Wolfgang Eder, Chief Executive of Austrian steelmaker Voestalpine.
“If I cannot trade globally with this product… then it will be rather tricky to build something up on a broad and sustainable basis.”
The LME is widely expected soon to announce that its contracts will represent steel that is physically deliverable rather than rely on a published index to set prices.
The exchange has not yet given details of specification, but the index it currently runs in collaboration with Platts covers hot rolled coil and reinforcing bar in Europe and North America.
Should the LME decide to make its steel contracts deliverable, it would render the index redundant, senior industry figures say.
Craig Bouchard, President of U.S. steel services firm Esmark, which will acquire U.S. steelmaker Wheeling-Pittsburgh later this summer, thinks this is a good idea.
“There has to be an underlying piece of steel somewhere. The underlying component adds the tangible, measurable guts to a product that is traded across the world,” he said.
“And a synthetic (index: Quote, Profile, Research can be manipulated with bad information. The synthetic, I don’t think, will have the confidence with the real derivative players.”
The LME’s successful base metals contracts are deliverable, so the market may take confidence from a steel product that follows this model, but it is not without difficulties.
“I think that would be very tough, and that comes down to quality differences to the regional differences in the market, Calyon’s Widmer said.
Unlike copper, tin and aluminum, steel cannot be stored indefinitely without some degradation.
“The fact that rust never sleeps, and that things like coils are easily damaged, greatly complicates settlement by physical delivery,” said Charles Hatton, a Senior Vice-President at brokerage Man Financial.
Given these issues it could take years for the market to build liquidity, but the banks are prepared to wait.
“We will wait,” Brian Olson, Head of Metals Trading at Barclays Capital said. “We’d rather the process take longer if that means the contracts have been developed and launched with the full consultation and support of banks, trade houses, producers and industry.”
The International Iron and Steel Institute, which represents over 190 steel producers, said at the Reuters Global Mining and Steel Summit last month that it doubted the current proposals would succeed, and it was wrong to view steel as a commodity at all.