Steel: Forging a future

Steel futures bring transparency, efficiency to market

Steel: Forging a future
2013-04-07T00:00:00Z 2013-04-08T09:54:06Z Steel futures bring transparency, efficiency to marketKeith Benman, (219) 933-3326

For many years the steel futures market was all talk and little action, but those days are gone as more financial products tied to the price of steel come to market.

In April 2008, The London Metal Exchange was the first to launch steel futures with its steel billets. Shortly after, CME Group started offering its U.S. Midwest hot-rolled coil futures.

This February, with a four-year track record to build on, U.S. Midwest hot-rolled coil futures set a monthly volume record of 6,619 contracts on the NYMEX exchange, according to CME data.

In September, CME Group launched trading of U.S. Midwest scrap futures and announced the first trades in its new hot-rolled coil steel options. Those options set a record of 1,350 contracts in February.

And participants in the market expect more products to be developed, such as futures offerings for rebar and plate steel, according to Jonathan Putman, president and CEO at Standard Steel Trading, of Atlanta.

"Those both have long life cycles," Putman said. "There is a huge pent-up need for that, so those products will come out."

The futures are being used mainly to manage risk in the marketplace, with few buyers taking physical delivery of the steel, Putman said.

Both open-interest and monthly volume in the hot-rolled coil futures have increased significantly during their lifespan, according to Young-Jin Chang, director of metals, research and product development at CME group.

Overall, monthly open-interest through the end of September was up 28.9 percent compared to the comparable period in 2011. That compares to a 23.2 percent increase in the comparable period of 2011, compared to 2010.

Before February's record, the top monthly trading volume in CME's hot-rolled coil steel futures was set in January 2012, at 6,214 contracts. The month before, trading volume was 5,905 contracts.

"What we see now is those early adopters fully utilizing the contracts when they can see them working for their business," Chang said.

CME Group is now promoting the concept of its Virtual Steel Mill, which allows market participants all along the supply chain to manage price risk. Products offered include swap futures for iron ore and freight products.

With the scrap futures launched last year, price risk in the supply chain can be managed as early as the demolition site or scrap yard, Chang said.

Steel futures and options are not expected to affect the volatility of prices in the overall market, Chang said. Instead, they are mainly a tool individual market participants such as steel service centers can use to manage risk.

"It makes the market more efficient and transparent, so you can react to the market quicker and take action quicker," she said.

Tom Modrowski, CEO of Esmark Steel Group, said volatility in the steel market will help bring these steel futures and options platforms from "infancy" to a "thriving" level in the next five to 10 years. 

Price swings can occur at a faster pace than steel products or raw materials that move through a supply chain, especially those from international destinations, he said. As a result, firms that do not have hedges expose themselves to a lot of market risk.

Esmark has been eyeing the evolution of the markets and investigating how it could be implemented at its service centers.

"You have to look at it," Modrowski said. "You're missing the boat if you're not looking at it."

The London Metal Exchange emphasizes its steel billets can be "physically settled" with the delivery of product. However, figures released by the exchange show only a fraction of the contracts are being settled by actual delivery of steel billets.

Those figures show that use of futures has expanded steadily, with trading in steel billet futures up 15 percent in 2011 and equivalent to 14.25 million metric tons, or $8.02 billion, according to complete-year figures from the London Metal Exchange.

The London Metal Exchange has several warehouse locations in Northwest Indiana.

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