Big Steel's Vested Interests and Opposition to Futures Markets

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Commodities, Ferrous Metals

Now why do I feel that many of you would rather be reading about about GrinderGirl than what the CEOs of two major steel producers had to say about futures markets? Well in a way, some of the statements made at that ironically named “Steel Success Strategies” conference were about as crazy as GrinderGirl’s antics. Many of these comments raise a lot of questions. Consider the following:

Dan DiMicco, Chairman and CEO of Nucor recently said “that futures trading was Ëœphony baloney’ that encouraged unethical and illegal activity.” Why would the CEO of Nucor make this comment? Specifically, who/what does he mean by unethical and illegal? Mortgage CDO traders? We can’t help feeling Dan DiMicco is being deliberately misleading when he discusses futures trading and sub-prime loans in the same breath. He knows there is no connection or even similarity between the two but he is attempting to bad mouth futures markets by making a false link to discredited CDO’s. There is nothing illegal about futures markets they have been in existence for well over 130 years; if there was anything illegal about them you can be sure a lawyer would have found it before now. And tell me is there anything immoral about a buyer or seller wanting to stabilize their company’s prices by buying or selling forward on an exchange? Nucor is making record profits on the back of a market made unnecessarily tight by US producers opportunistically exporting while putting their long suffering domestic customers on allocation. Now Dan, is that a morally defensible position?

Lakshmi Mittal also recently said “he saw no positive impact from a move that benefits only traders”. Strong statements from two of the industry’s key CEO’s. It makes us wonder why they are so staunchly opposed to futures trading. What is really going on here? It is not true to say only traders benefit from access to futures markets, the futures markets were created by producers and consumers coming together and seeking to protect themselves from price movements while goods were in transit. That is still a large part of the metals markets purpose today allowing producers and consumers to sell or buy a portion of their production or consumption forward at today’s known prices. Yes there are traders and investors and speculators in the markets but they provide the liquidity to ensure there will always be a counter party. There are traders in today’s steel market. Is Lakshmi Mittal suggesting they serve no purpose or worse should be banned? While the US mills sell the US market short by exporting product abroad, it is traders as much as overseas producers who are bringing in material to supplement the absence of domestically produced material.

Mittal went on to say “[futures trading] has no positive impact. I don’t know if it is negative, but I am not seeing a positive impact on any product that is already in the futures market.” We see an ulterior motive in not supporting futures markets. What futures markets do provide is clarity on prices. Because so many buyers and sellers come together each day to fix the price it can truly be said to be a market price. The price reflects a balance of supply and demand. Can it be manipulated or distorted? Yes it probably can as many believe we are seeing in today’s markets with ETF’s piling into gold and oil futures. But that is true of any market, futures or not. In the steel industry, the major producers set what price they think they can get away with. It is not a reflection of the cost of production and let’s not pretend it is set with the customer’s interests in mind. So in terms of taking price setting out of the hands of the dominant producers futures markets can be said to be very beneficial. And therein lies the reason for the producers’ opposition.

What do our readers make of this “we can create more value by coming close to the customer instead of allowing them to look at futures for their business” ¦mumbo jumbo. This is almost a cliché when producers want a one to one dialogue with their customer to try and prevent any competition. If by this Mittal means he creates value by generously providing a tonnage allocation to larger customers in a market made tight by his own actions then it is of dubious value in our books.

We summarize with one question, what positive steps do you feel steel producers have taken to coming closer to their customers? I’m sorry what did you say? I can’t hear you? You can’t think of anything? Neither could we.

–Stuart Burns & Lisa Reisman

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