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For producers, the sticking point is ceding pricing power


After years of planning and vigorous debate, steel futures have arrived, ushering in what could be the start of a fundamental shift in the pricing of one of the world's most important commodities.

For major steel producers, this was the future that many of their executives rallied against. The fear is that forward steel contracts could transfer pricing power out of corporate hands and into those of speculators on commodity exchanges. Producers' resistance hasn't diminished as the number of futures contracts expands across the globe.

The Dubai Gold and Commodities Exchange launched a steel futures contract for reinforcing bar last year; the London Metal Exchange began ring trading steel futures in late April; and despite several delays, the New York Mercantile Exchange plans to launch its own contract. At the forefront of the battle against steel futures has been ArcelorMittal SA, the world's No. 1 steel producer and—given its dominant position—arguably the producer that has the most at stake.

Lakshmi N. Mittal, the Luxembourg-based steelmaker's chief executive officer, has insisted that steel futures aren't a worthwhile endeavor and challenged the LME's claims that the contracts will help stabilize prices in a sector well known for its price volatility.

Producers like ArcelorMittal point out that metals already priced through futures contracts are seeing extreme volatility. Nickel prices, for instance, rose last year to all-time highs exceeding $50,000 a tonne but have since collapsed to about half that level.

Following the commencement of steel futures trading on the LME, ArcelorMittal didn't back down on its position. "We do not believe that financial institutions speculating on steel prices will bring any benefit to the long-term sustainability of our industry," the company told AMM. "We believe the only true way to bring stability to the steel industry is through consolidation. ArcelorMittal has been at the forefront of this consolidation and the results are already being seen."

ArcelorMittal was formed by the 2006 merger of Mittal Steel Co. NV, Rotterdam, and Arcelor SA, Luxembourg, a nearly $40-billion combination that brought new meaning to the word consolidation. Since that time, steel prices have gained considerable traction, aided by strong demand from emerging markets, especially China and the Middle East, and rising production costs resulting from surging iron ore and coal values.

Mittal also argues that steel producers are acting more responsibly now than they had in the past by reducing output during times of low market demand, helping to stabilize steel prices and reduce volatility.

Germany's ThyssenKrupp Steel AG, Duisburg, Germany, said it isn't interested in taking part in steel futures trading, pointing out that spot business represents only about 5 percent of the company's sales. "Our business model is based on long-term customer relationships, with high value-added carbon flat steel products," a company spokesman said.

Other major steel producers are staying out of the debate for now. "We're simply taking a wait-and-see position on futures," a spokesman for Pittsburgh-based U.S. Steel Corp. said.

Nucor Corp., Charlotte, N.C., failed to return calls seeking comment on the issue. However, Daniel R. DiMicco, the company's chairman, president and chief executive officer, has stated previously that speculators and other financiers are the ones that stand to make money from futures, not those actually in the industry.

Indeed, several traders and Wall Street banks, anxious to obtain further exposure to the booming sector, have expressed support for steel contracts in recent weeks.

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