LONDON/DUBAI, 13 October 2006 — Commodities exchanges around the globe are racing to be the first to launch financial instruments for the steel trade, a $500 billion market.
Unlike the energy and base metals markets, steel lacks a transparent global benchmark for setting prices or a way to offset the risk of price movement by buying or selling contracts for goods for delivery in the future. The Dubai Gold and Commodities Exchange (DGCX) is leading the pack with its plan to get a futures contract trading before March 2007. By then, the London Metal Exchange, the world’s biggest base metals market, and partner Platts will have started publishing the index prices that could be the basis of an LME contract.
The Dubai steel contract will be for 10 tons of grade W460 reinforcing bar (rebar) 12 meters long, David Rutledge, chief executive of the Dubai Multi Commodities Centre, part-owner of the DGCX, told Reuters. “I would expect it to be before next March. I think it would be some time earlier. The contract is basically finalized,” he said.
Futures contracts would allow steelmakers to lock in prices, Rutledge said. “What that would do is give them more predictable cash flow from their milling operations and the bankers will be happier with more predictable cash flows,” he said. “Most of the interest is certainly coming from the banking sector.” Openly traded futures would also allow financial market speculators to bet on whether steel prices rise or fall, just as they get involved in base metals, energy, currencies and stock markets. “If...speculators or funds or hedge funds choose to participate in the market then I do not see that is a bad thing,” Rutledge said.
For futures to be freely traded, the goods they represent must meet a common specification. Steel, an alloy of iron and carbon, is not a homogenous material, but Rutledge thinks rebar fits the bill. “What we were able to do here is to say, well, there is one particular description of steel namely rebar, which is a standardized product, which effectively as far as the construction industry is concerned is a raw material, which can be traded by description,” he said.
The London Metal Exchange and Platts on Tuesday gave details of the rebar and hot-rolled coil specifications for which they plan to publish index prices. An index would be the first step toward cash-settled futures.
Progress will depend on the steel industry’s response, though the LME has not set targets for how widely used it thinks the index should be for it go ahead with the project. “There’s not a...figure we’re looking at,” Liz Milan, who manages physical operations at the LME, said at an industry meeting on Tuesday. “It’s what the market tells us, it’s the feedback we get,” she said.