LME Steel Billet Contract: The Metal Market's Sick, Dying Animal

LME steel billet stacks
Source: commodities-now.com

Have you wondered why the LME steel billet price is floating around under US $300 per metric ton when scrap is $350-400 per ton (depending on destination), and the Black Sea port steel billet market (the principal trading hub for billet) is pegged at over $500 per ton by analysts Delphica?

Well, we have too. Doesn’t make sense, does it?

current steel prices - MetalMiner IndXTalk of billet being an illiquid market may well be true, although earlier this year there was much trumpeting of 2011 being a record year for the London Metal Exchange’s steel billet contract. At the time, the LME contract was trading in a range between $550-600 per ton, comfortably above scrap at around $420 per ton, and logically below the CME US Midwest Domestic HRC Futures price around $680-700 per ton.

At the time, about a year ago, Black Sea port prices were higher than today, but the fall in Eastern European and Turkish billet prices has been in the order of tens of dollars since compared to hundreds of dollars for the LME contract.

So, for some answers, let’s refer to Reuters’ sage reporter Andy Home. Writing a week or so back, Andy explains in some detail the background to the LME contract and the peculiar problems it is facing.

Firstly, the main feature of all LME contracts is that they should be physically deliverable. It is core to the LME’s ethos as a market of last resort. Delivery points for the steel contract were originally in the Far East — Incheon in South Korea and Johor in Malaysia — and in the Mediterranean, at the two Turkish ports of Kocaeli and Tekirdag.

This is entirely logical, in that all these destinations are key locations for volume trading of steel billets.

today's metal prices - MetalMiner IndXHowever, China slapped export duties on steel billet in 2008, effectively removing the main source of physical liquidity in the Asian market and making the Asian delivery points defunct.

Due to local tax laws, Turkish steel mills could not make use of the Mediterranean delivery points without incurring tax duties, depriving the contract of the main market makers in the Black Sea/Eastern Mediterranean billet trade.

Continued in Part Two.

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