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Steel is an industry of immense global proportions, with diverse products and applications. The steel industry has become more global, more efficient and more financially viable.
Market conditions have resulted in high prices, supply disruptions and increased business volatility. This volatility has led consumers to look for other ways to mitigate their price risk including the establishment of variable cost contracts, surcharge mechanisms and over the counter derivative (OTC) products. But many of these options also bring with them a new set of issues and risks.
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“Of course we intend to use the LME billet futures contract to hedge our billet prices…the steel sector operates overwhelmingly on spot basis… this results in a more volatile market and increases the risks of companies. Futures trading will help the sector to normalise in that sense.”
Ugur Dalbeler, General Manager, Çolakoglu, Turkey President, IREPAS Source: Metal Bulletin
| Significant portions of the steel industry now see the need for increased price transparency to enable them to better manage their price risk, better manage their cash flow and more effectively predict profits.
The introduction of exchange-traded derivatives would enable all of these activities as well as price transparency through a forward price curve out to 15 months.
The LME steel billet contract should also correlate with the scrap and rebar sector making the benefits available to large parts of the steel industry.
The LME has received support for the development of steel futures from producers, rerollers, merchant traders, the construction industry and also LME member firms.
Unlike many exchanges, the LME designs futures contracts to address particular industry needs, and consequently, steel industry input and feedback plays a major part in this contract development before and after launch.
Steel billet is a growing market and has experienced production growth of circa 40% since 2000, with analysts suggesting a further 32% growth on today's annual production of 512 million tonnes by 2010. Market intelligence suggests that merchant traded billet amounts to circa 30 million tonnes per year.
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