Shanghai Launches Steel Futures Market

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The timing could be said to stink as China launched it’s first steel futures contract last week on a trial basis with transactions to go live on the March 27th according to CNBC. The market price has dropped dramatically since last year but more importantly so has tonnage and with it the industry’s confidence ” two key ingredients in generating volume for the new contracts. The futures contracts will be for steel wire and steel reinforcing bars and will differ from existing forward contracts in that they will only cover these two materials and will be for strict units of quantity and  standardized grades from approved sources, as distinct from the well developed forward market which covers a wide range of materials traded  on the  over-the-counter market.

Reception has been mixed so far ChinaMining reported, some traders citing the low inventory levels, short mill delivery periods and aversion to risk in the current climate as being major impediments to an early adoption of the hedging instruments. Estimates of the eventual market size are ten times the existing contracts for copper and zinc. Copper is currently the most actively traded product on the Shanghai Futures Exchange but China consumes some 200 million tons of steel long products compared to just 5 million tons of copper. Although brokers have been furiously poaching staff from the forward market traders to build up their teams, traders are still expressing concerns that if volumes are low there will not be sufficient liquidity to hedge effectively. The LME’s contract for steel billets ” a precursor to wire and reinforcing bars – has also suffered a lack of liquidity in Asia. Of 1.29 million tons traded since launch last year, 1.1 million tons has been the Mediterranean contract and only 0.18m tons for the Asian contract requiring delivery to Johor, Malaysia  or Inchon, South Korea  according to Forbes.

Others may argue that if the futures contract can start quietly and build a following now, it may not be a such a bad time to launch. China’s stimulus package will be targeted to create demand for metals and domestic producers will get priority. Developers may find the ability to hedge raw material costs at today’s low prices for projects not due to kick off for 6-9 months attractive – just the validation the supporters of future’s markets are hoping for.

–Stuart Burns

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