The Futures for Steel

Just recently, another futures contract for steel was launched this time by the London Metals Exchange (LME). The 131-year-old LME, the traditional home for base metal trading, introduced its first contract for steel on Jan. 25. Initially, the trading is being done via electronic deals. Open-outcry trading is scheduled to commence on Apr. 28.

But prior to that, the Dubai Gold and Commodities Exchange (DGCX), the first international commodities derivatives exchange in the Middle East, introduced its first steel futures contract three months ahead of LME in Oct. 2007. With the launching of its steel reinforced bar (rebar) futures contract, DGCX is poised to win the race among commodity exchanges for an internationally tradable steel futures contract.

Indeed, commodities exchanges around the world are racing to launch futures contracts for the US$500 billion steel industry, which lacks a global benchmark for pricing.

During the first day of trade at LME, steel volume soared to about US$1-million in value. The Far East contract for steel futures stood at US$755 per ton, while the Mediterranean contract stood at US$785 per ton on the opening day.

The Middle East is fast-becoming a major steel consumer, now with over 50-million metric tonnes per annum (mmtpa) consumed. Nonetheless, China and India still dominate the market's demand-side.

There are also exchanges in India and China that are offering steel futures; however, the prices discovered in them are confined to the respective markets and only domestic firms are allowed to trade. Not unlike DGCX, which is open to all international companies.

The New York Mercantile Exchange (NYMEX), the largest physical commodity exchange in the world, and Shanghai Futures Exchange of China are also working on the launch of steel futures contracts this year.

Here are some notes on some of the world's major exchanges’ latest plans about steel futures:

Dubai Gold and Commodities Exchange (DGCX)

• Each contract will be for 10 tonnes of grade W460 rebar of 12 metres and will allow for physical delivery at DGCX-approved delivery points in Dubai, which can be used as optional warehouses.

• The exchange will list three delivery months — initially December 2007, January 2008 and February 2008. Additonal delivery months and a weekly delivery cycle will be added as market liquidity grows.

• The steel contract is the first of four contracts targeted at the steel supply chain that the exchange plans to issue. The three others are for stainless steel, flat products and freight.

London Metals Exchange (LME)

• The LME had launched two steel futures contracts. But the contracts, which cover steel billet for delivery in the Mediterranean and Far East, will be tradeable on electronic platform. Open outcry trade will start on Apr. 28.

• Contracts out to 15 months will be available and the lot size will be 80 tonnes, loose or in bundles of seven to nine tonnes in billets, which are semi-finished products.

• The initial delivery location for the Mediterranean contract will be at Istanbul in Turkey, and for the Far East contract at South Korea. Lot sizes for both contracts will be 65 tonnes.

New York Mercantile Exchange (NYMEX)

• NYMEX will launch a steel futures contract later this year based on the SteelBenchmarker index of World Steel Dynamics,Inc.

• The expected contract will be USA hot-rolled band steel futures and will be cleared on the NYMEX ClearPort system.

• The contract will be 20 short tons with a minimum price fluctuation of 50 cents per short ton and will be listed for 18 consecutive months.

• Final settlement day will be the fourth Wednesday of the current contract month.

Shanghai Futures Exchange

• The exchange is planning to introduce rebar and steel wire futures sometime on the next two years, while awaiting for significant support from China’s steel industry.