Continued from Part One.
The London Metal Exchange tried adding Italy, but a similar quirk of VAT meant Italian delivery points didn’t generate a viable market.
North European delivery points at Rotterdam and Antwerp generated initial interest and new delivery points at Chicago, Detroit and New Orleans in the US attracted a more entrepreneurial crowd such that those three destinations currently hold over 21,000 tons.
Prices cannot reflect the market for which the contract was originally conceived without a huge discount. Liquidity has consequently drained from the market all year and arbitragers and hedgers have moved to other products like the CME’s HRC contract.
The LME realizes this can’t continue.
The price is nowhere near representative of the market it is supposed to serve, and as a result, from February next year, no further deliveries to the US locations will be possible prior to full delisting in May 2014. Both Asian locations will similarly be de-listed, as will be the delivery point in Dubai, intended to serve the Middle East rebar market.
Reuters explains the global billet contract will return to being a European/Mediterranean contract, fortuitously timed to take advantage of a probable change in Turkish tax codes allowing certain commodities in bonded stores to be traded without incurring tax duties.
Two big “ifs” remain.
Firstly, will the Turkish tax authorities change the rules as hoped for? And secondly, even if they do, will the LME steel billet contract ever be able to catch up with the host of new products that have come onto the market and become established since?
Only time will tell, but in the meantime, volumes will likely continue to collapse and the contract will continue to be marginalized — ultimately dooming it as irrelevant.