LONDON The London Metal Exchange is "committed" to the steel industry despite its only ferrous contract becoming increasingly disconnected from the physical steel market.
Cash prices for the steel billet contract tumbled as much as $400 per tonne below physical benchmark Commonwealth of Independent States (CIS) billet prices last week, the biggest disconnect between the physical and paper markets since the LME launched its billet contract in 2008 (amm.com, Feb. 25, 2008).
The gap widened in the second week of July this year after the LMEs steel billet cash contract plummeted to less than $100 per tonne July 16.
Benchmark CIS billet f.o.b. Black Sea prices have remained close to the $500-per-tonne mark since July 2012, with AMM sister publication Steel Firsts assessment of the semifinished physical product rising to $512.50 July 15, 2013, amid higher scrap prices.
"The LME remains committed to the steel industry and believes the billet contract, and other contracts under consideration, will play an important role helping (the) sector to manage its risk," a spokeswoman for the exchange told Steel First. "We continue to look at all products in the steel suite, as well as iron ore."
LME billet prices have become increasingly disconnected from physical billet prices in the past year, following the LMEs November 2012 decision to delist six warehouses as delivery locations for the contract.
Warrant holders were told that they had until May 30, 2014, to remove steel billet from warehouses in Detroit; Chicago; New Orleans; Johor, Malaysia; Dubai, United Arab Emirates; and Incheon, South Korea. Warehousing queues in U.S. locations, particularly Detroit, have been one of the issues plaguing the billet contract.
"Until U.S. stocks are removed and Mediterranean ones are created, the LME steel price will remain heavily discounted to (the) CIS billet export price," a European steel trader said.
Low deliver-out rates of just over 1,000 tonnes per day, and billet sitting behind huge aluminum stocks, means Detroit billet warrant holders have to wait much longer than six months to take delivery of their material.
The LME remains hopeful that the delisting of problematic warehouses will attract a wave of fresh interest in the ailing LME billet market. "Delisting non-European locations is a necessary step to revitalizing the contract," the exchanges spokeswoman said.
Despite the lack of liquidity in the market, a few participants could still stand to make money from the contract through warehousing plays, market sources said.
The contract is no longer seen as a price mechanism by the bulk of the market, the source added.
A version of this article was first published in AMM sister publication Steel First.