Scrap futures debut, but initial reviews are mixed

Oct 31, 2012 | 07:00 PM | Gregory DL Morris

Tags  AMM Midwest Ferrous Scrap Index, No. 1 busheling, CME, Yong-jin Chang, Cleartrade, Richard Baker, Thomas Danjczek, Steel Manufacturers Association Gregory DL Morris

The Chicago Mercantile Exchange trading floor.

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Several weeks after the launch of a new ferrous scrap futures contract by CME Group Inc., the outlook for the new risk management tool is still mixed.

Everyone, from the developers at CME to traders, buyers and sellers, readily agree that these are still very early days. Supporters note that there has been a flurry of early trading--modest volumes, to be sure, but a positive note on which to start. There are no detractors, per se, but there are more than a few in the industry who doubt the utility of such a contract for both technical and strategic reasons.

Even the competitive picture is mixed. Cleartrade Exchange Pte Ltd., Singapore, just started trading a scrap contract that settles against the Turkish Scrap Index, and India’s National Commodity and Derivatives Exchange said it plans to launch a ferrous scrap futures contract by year-end, but a representative of the London Metal Exchange, which has no current ferrous scrap contract, declined to comment on whether it was contemplating developing something similar.

The new CME scrap contract is settled against AMM’s Midwest Ferrous Scrap Index for No. 1 busheling. That is relevant because both the CME and the LME launched steel futures contracts competitively in 2008. At the time, global steelmakers expressed concern that such a contract would stoke speculation in a market that traditionally has been the domain of just buyers and sellers. The CME primarily handles contracts in agriculture and energy, precious metals and currencies, as well as equity indices and interest rates. In contrast, more than three quarters of the LME’s business is in industrial metals futures, including steel, aluminum, copper and nickel. ....