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No need for scrap futures contracts: Abbott

Keywords: Tags  scrap, scrap futures, BIR, Bureau of International Recycling, Martin Abbott, LME, London Metal Exchange, Michelle Madsen

WARSAW, Poland — Martin Abbott, former chief executive officer of the London Metal Exchange, dismissed the need for scrap futures contracts at a recycling industry conference in Warsaw.

Derivatives for primary metals should be used as benchmark products for scrap merchants wishing to hedge, rather than scrap futures contracts, Abbott said Oct. 29 at the Bureau of International Recycling (BIR) meeting.

Metals derivatives should be based on homogenous materials, he said, noting that stainless steel scrap traders already use the LME nickel contract to hedge the nickel content of their product.

A rival commodity derivatives trading platform, CME Group Inc., launched a U.S. Midwest busheling ferrous scrap contract in September 2012, based on AMM’s Midwest Ferrous Scrap Index for No. 1 busheling.

The first trade on the contract was made on September 10, brokered by Freight Investor Services, with Macquarie Bank acting as a general clearing member.

Abbott, who guided the LME through its $2.1-billion sale to the Hong Kong Stock Exchange earlier this year, suggested that ferrous scrap should be hedged on futures contracts for billet, a semifinished steel product.

The LME launched its own steel billet contract in 2008, but this has been beset by problems, including issues concerning warehousing queues, shrinking liquidity and a failure to deal with tax issues in Turkey, the biggest market for the semifinished product.

CME Group’s Black Sea billet contract, which launched in 2011, has attracted attention from a number of former supporters of the LME contract, including JPMorgan Chase & Co. and Stemcor Holdings Ltd.

Abbott blamed a lack of volatility in physical billet prices for interest in the LME contract falling to record lows.

The futures market must be open to "different users with different motives," he said, adding that "the role of speculators and investors must be recognized because liquidity is absolutely key."

A version of this article was first published in AMM sister publication Metal Bulletin.

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    Oct 31, 2013

    He ignores the utilty of the scrap exchange to hedge pig iron and HBI by pegging them to scrap prices for mill and foundry distribution on a montly or quarterly basis..

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