Steel commodity trading is the wave of the futures

Jun 30, 2012 | 07:00 PM | Gregory DL Morris

Tags  steel futures, CME Group, Midwest hot-rolled coil contract, James Oliver, LME, steel billet contract, Chris Evans, Cleartrade Exchange Ray Ang

Early in May, the Chicago Mercantile Exchange (CME Group) moved the first steel billet swaps cleared by a U.S. exchange, the latest expansion of risk-management tools in global iron and steel. The CME confirmed that it cleared 6,000 tonnes in one trade and 3,000 tonnes in another. The broker of the first trade was Freight Investor Services Ltd., and it was split over the third and fourth quarters of 2012, which equates to 1,000 tonnes per month from July to December. Deutsche Bank AG confirmed another party’s involvement but declined to comment.

Steel is widely considered to be the last major global commodity to be actively traded under both physical-delivery and cash-settled contracts. The CME Group and the London Metal Exchange introduced contracts in late 2008 and early 2009. Total volumes and the number of contracts and participants have grown slowly, but both exchanges say they are pleased with the progress and are developing new instruments.

The CME Group started with an indexed contract against Midwest hot-rolled coil, while the LME offered billet contracts and stuck with its tradition of physical business. The CME billet contract marks an important expansion for the market, but it also presents a more direct challenge to its competitor across the Atlantic, which is evaluating a financial steel offering but is a year or two away from bringing anything
to market.

Separately, other exchanges are being developed with the intent of adding new hedging vehicles. The entire global enterprise has had its growing pains, not the least of which was the collapse of brokerage MF Global at the end of 2011. MF Global was not directly tied to any of the exchanges, but it was an active participant in steel hedging and its withdrawal from daily business was a blow to the market financially as well as psychologically.“Steel is one of the last commodities that does not have a derivative contract,” said James Oliver, senior director of metals for CME Group Inc., owner of the CME. “One of the primary challenges is that there are so many types and grades that it is difficult to determine against which of them to settle a contract. When it comes down to what mills actually produce, steel is a finished product and not really a standard commodity. Another problem is that it is difficult to store because it rusts so readily.”....

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