Consumers (still) Awaiting The Arrival of NYMEX's HR Steel Contract

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Ferrous Metals

It was meant to come to market in 2006, then in 2007 and with much anticipation in Q1 2008. I speak of course of the NYMEX HR steel futures contract. But the start date has been put back yet again. Meanwhile the LME steel billet contract has got off to a quiet but solid start in London back in February. It will go live later this month. Further shapes and grades are being added as the contract gains popularity but meanwhile North American buyers will have to wait a while longer for the proposed start date of their HR coil contract.

You can read an  earlier blog post on the subject here. Our own conversations with NYMEX suggest a start date could be in the late summer; delays due to the merger of the Chicago Mercantile Exchange (CME) and New York Mercantile Exchange (NYMEX). NYMEX reckon they have the contracts figured out and are ready to go, but quite when they are not saying.

Unlike the LME which is a deliverable contract, the NYMEX HR coil contract will be financially settled, so producers and consumers can not use the contract for market delivery. It will be a Financial hedge only. Unlike billets, HR coil is a semi finished product. The characteristics of the product vary slightly from producer to producer meaning consumers often have preferences as to producers which are not defined in the production standards. In addition HR coil cannot be stored indefinitely in the way primary products can, making a physical contract impractical. Nevertheless it still offers the same opportunity for long term hedging and promises to bring much needed price transparency to steel consuming companies who have to give fixed prices to their OEM clients.

One cause of anxiety, however, relates to increased volatility.  The introduction of so many new financial players into the steel market will undoubtedly have that effect. These financial players will take many forms and their interests will be different from producers and consumers. Speculators will be looking for profits, and though they provide the liquidity that allows the market to work, they can also over egg price movements as we have seen in oil.

But like it or not steel futures are on the way. In time, most significant sales will use the contract as the benchmark, and whether or not it increases or decreases stability, buyers will have the opportunity to at least manage their price volatility in a way they can’t now.

–Stuart Burns

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