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In theory, buyers benefit big time from price transparency


With futures trading promising to illuminate the shadowy world of steel price negotiations, consumers generally are supportive of the move to greater transparency.

That's not to say they're rushing to the ring to participate. There is some nervousness that the contracts could backfire and spark even greater volatility and price rallies. But even from the sidelines, many consumers see merit in steel futures.

"Ultimately it should help the market function better because anything that increases transparency and allows for hedging tends to lead to better market performance," said Bernard Markstein, senior economist and director of forecasting at the Washington-based National Association of Home Builders. "It is true in some situations you can introduce speculation that can lead to more volatility. But in most cases the introduction of futures markets, which allow for hedging, reduces volatility and overall improves the market, which is actually to the benefit of both the producer and the buyer."

Markstein concedes that the new contracts might be "a little rocky at first," given that volumes could be thin and there might be a lack of knowledge about how to use them. "But over time, it fills a need and you will see some deepening of the market and in overall functioning," he said. "I just don't see how it could be anything but a good thing for everybody concerned."

Auto companies, a major end-user of steel products, appear encouraged by the start of steel futures trading.

"Steel is a significant commodity exposure for automakers, and hedging offers the industry an important new tool for managing price risk. However, risk management tools like derivatives for hedging are, for the most part, not available," said a spokesman for Dearborn, Mich.-based Ford Motor Co. "This is a positive step toward a more liquid market for steel derivatives."

Executives from Chrysler LLC, Auburn Hills, Mich., refused to comment, but General Motors Corp., Detroit, is leaving the door open. "We're exploring hedging and various other strategic alternatives to reduce costs over the long term," a spokeswoman for GM's purchasing department said. "We're aware of it, but we've not taken a position on it."

Executives from agricultural and construction equipment makers, also important end-users of steel, are watching with interest but might not be ready to commit to using futures until trading volumes are sizeable. "If there becomes a viable market for this kind of instrument, then we would certainly evaluate its potential," a spokesman for agricultural and equipment maker Case New Holland Inc., Racine, Wis., said.

Energy pipeline builders also might need further convincing. One of the largest pipeline companies, ConocoPhillips, Houston, said it has no current plans to get involved in steel futures. "We are not involved in, nor do we actively monitor, steel futures contracts," a spokesman said. "Instead, we work and contract with fabricators such as the OCTG (oil country tubular goods) market and discuss changes in their realized raw material costs."

That hesitancy to embrace change also is being felt among those in the service center sector. Many are uncomfortable with the concept of steel futures and it will take some time for derivatives to catch on, according to the Metals Service Center Institute (MSCI), Rolling Meadows, Ill.

"Their view is every time they look at it, it seems to them that the pricing in the futures markets is not representative of what they think the pricing is in the real world," an MSCI spokesman said. "And they think that part of the reason is the required platoon of speculators that has to get in there to take the opposite sides of one of these contracts. That becomes another influence that has nothing to do with the real world."

But "that doesn't mean they won't use it," he added.

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