The debate over steel futures is
creating a ruckus in what is usually a quiet season. Amidst it
all, a voice has emerged asking for help in understanding what
these contracts really mean for his business.
PITTSBURGH - The future of steel futures
remains a hot topic in the global steel industry, with opposing
camps both secure in their beliefs-one that futures contracts
are necessary and will work to reduce volatility, and the other
just as certain that futures are not needed and will not
But a third camp is beginning to emerge.
Whether or not futures will work is a secondary question; their
primary question is whether or not those with steel interests
even understand the nuances of the concept in the first
Global steel producers for the most part
remain opposed to the introduction of steel futures contracts.
They say the issue of price volatility is being made moot by
rapid industry consolidation and the newfound ability of the
remaining steelmakers to manage supply to meet demand.
Lakshmi N. Mittal, president and chief
executive officer of ArcelorMittal, the world's largest steel
producer, is on record as saying futures are unnecessary and
will not work. Beyond the problem of the technical feasibility
of futures, Mittal said, lie such issues as physical
inventories and what grades of steel might be included in
futures contracts. ArcelorMittal is not promoting the idea of
futures contracts, he said, but the market ultimately will
decide their fate. It is up to steel customers whether or not
they think futures will add value for them.
"Futures are essentially a mechanism for
financial companies mainly dealing with hedging and futures,"
Mittal said during a presentation at the Steel Success
Strategies XXII conference in New York co-sponsored by
AMM and World Steel Dynamics. "It is not a solution
for curbing price volatility."
His stance is backed by Daniel R. DiMicco,
chairman, president and chief executive officer of Nucor Corp.,
Charlotte, N.C. DiMicco has said futures would serve only as a
hurdle between steel producers and their customers and would
not work to reduce price volatility. "In the end, the market
decides," he said in a recent interview.
But actions by some add to market confusion.
ArcelorMittal, for example, recently applied to become a
Category III member of the London Metal Exchange, leading some
to question its stance on futures. The LME is set to launch two
steel futures contracts in April next year.
ArcelorMittal said its stance has not changed
and that its application for membership is related to its
nonferrous business. The company does business in a number of
nonferrous metals, including copper, tin and zinc.
Martin Abbott, chief executive officer of the
LME, said the arguments by steel producers against futures are
exactly the same arguments made years ago by aluminum producers
when the LME began to put together futures contracts in that
metal. Those arguments fell silent as the aluminum futures
contracts proved their worth.
Abbott says steel futures contracts are a
fact of life. The LME expects to launch its first steel futures
contract, on billets, in April. Making the first contracts
physically deliverable is an important key since having a
delivery point of last resort "adds a colossal amount of
Besides, steel derivatives have been
available in over-the-counter (OTC) trading since Koch Metals
Trading Ltd. started offering OTC futures in January 2004. Now,
in addition to the LME, the Dubai Gold and Commodities Exchange
and the Shanghai Futures Exchange hope to have steel contracts
in place by the end of this year, and the New York Mercantile
Exchange also wants to launch a contract.
Yet many in the trenches still do not
understand the benefit or even whether benefits exist from
steel futures. A recent Letter to the Editor by Barry Lauer of
Baldor Electric Co. might have put it best when he asked, in
part, what advantages hedging or futures might bring, and to
whom. He said he and other steel buyers and producers have been
left with the impression that someone is going to make a lot of
money through the launch of steel futures contracts, "but it
ain't going to be us buyers and producers."
Others, such as Jonathan C. Putman of the
Birmingham Futures Exchange, disagree. Putman points out that
the ability to hedge offers steel users the chance to offer
fixed-price contracts to their customers. Steel producers,
after all, buoyed by consolidation, no longer are bearing the
risk of long-term price agreements with customers since they
now have adjustments for cost fluctuations built into supply
"Utilizing futures for any other reason (than
to offer fixed-price contracts to customers) is not hedging, it
is simply speculating on the part of the buyer, betting that
they can out-guess the market," Putman wrote in response to
Lauer. "If your customers don't need their prices tied down,
don't play in the futures market."