July 1, 2009
Steel Cos Mixed About Futures Trading On Scrap, Other Steels

NEW YORK — U.S. steelmakers were mixed about the World Steel Exchange's plans to launch new steel futures contracts with some saying they were opposed to futures in principle while others thought there was an important role for futures to play in the volatile steel industry.

The World Steel Exchange, in partnership with steel analytics firm World Steel Dynamics and the Chicago Climate Exchange, a unit of U.K.-listed Climate Exchange PLC (CLE.LN), plan to launch a cash-settled scrap futures contract by the end of the year. They hope to expand upon the scrap futures contract to offer futures contracts for different types of steel including slab, billet and possibly even iron ore, a key raw material used in steelmaking.

The World Steel Exchange is joining a bevy of other exchanges that have launched steel futures over the last year an a half. The London Metal Exchange launched a billet steel futures contract in February 2008 while the CME Group Inc. (CME) launched a hot-rolled coil steel futures contract last October. Steel futures contracts have also proliferated in China, India and Dubai.

But for the most part, steel futures volumes on most of the exchanges - with the exception of China - remain relatively thin, according to traders who use the contracts.

Speaking at the World Steel Dynamics' Steel Survival Strategies this week, Lakshmi Mittal, chief executive of the world's largest steelmaker ArcelorMittal (MT), said he didn't think steel futures contracts were well suited for the steel industry.

"I do not believe that financial companies should be involved in our futures market," Mittal told the audience at the conference.

"We cannot hedge our risk through a futures instrument, we have to hedge through our services, our close proximity to customers. I think that action will hedge our risk rather than going through the futures market."

Mittal emphasized that closer relationships with customers would be a more productive and natural hedge against price volatility than futures contracts, which can be subject to manipulation from financial institutions.

Keith Busse, CEO of U.S. steelmaker Steel Dynamics Inc (STLD) shared Mittal's views and added that steelmakers such as Steel Dynamics, Nucor Corp (NUE) and U.S. Steel Corp (X) were unlikely to use the futures contract because "we don't want to abdicate our marketing to others who are working from a purely financial perspective."

Busse said a key component of the current financial crisis was caused by financial institutions speculating in securities products that they didn't understand how to use.

Michael Coslov, CEO of scrap and raw materials services provider Tube City IMS, Inc., was more optimistic about the potential benefits that the steel industry can reap from scrap futures.

"I think it's terrific and great for customers. It's an insurance contract" against price volatility, he told Dow Jones Newswires.

Nevertheless, he said Tube City was unlikely to use the contract "unless our customers ask for it. We don't take positions in the market that way." Tube City procures scrap on behalf of its clients and then helps them profit from scrap. As a result, Tube City would most likely advise its clients when and how to best take advantage of the scrap futures contract.

Patrick McCormick, President of the World Steel Exchange's marketing arm, said the comments above represented "an educational opportunity" to show industry stakeholders the benefit of steel futures and hedging.

He noted that the World Steel Exchange's scrap futures contract wouldn't be exposed to manipulation by financial institutions because it would be cash- settled against an index that is based on physical transactions between buyers, processors, traders and other customers in the physical market and didn't include financial institutions.

With regard to those who were skeptical about using futures contracts on the premise that it spurs speculation, McCormick said, "if you're not managing your price risk, (that's) speculation."

Source: Dow Jones Newswires, June 25, 2009





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