* LME due to launch new steel rebar, scrap contracts in Oct
* Exchange making progress in getting market makers-source
* Support also needed from banks, major steelmakers
By Maytaal Angel and Eric Onstad
LONDON, May 28 (Reuters) - The London Metal Exchange (LME) is close to sealing deals with market makers to guarantee liquidity for its new steel rebar and scrap futures, a move that industry experts say is a step in the right direction.
But for real longevity, the contracts will need crucial support from major banks and participation of major steelmakers and institutional investors.
A senior level source with knowledge of the process said progress had been made in discussions with professional market makers as well as physical traders. The contracts are scheduled for launch in October.
“Having market makers would make a huge difference. In the current steel contracts there are no market makers,” said Antonio Novi, a director at Levmet, a metals trader that also provides hedging services to industrial companies.
“If it’s true that there’s market makers, we’ll be using it, but until I see it I’ll doubt it very much.”
The LME’s only existing steel contract, a physical contract for billet, has struggled with scant volumes. Its new steel contracts will be cash settled, and so cannot be crippled by problems withdrawing metal from LME warehouses.
Some key steelmakers joined the LME Steel Committee earlier this year, including U.S.-based AK Steel, Geneva-based Klesch Group and the Turkish Steel Exporters Association.
“It’s great that these steelmakers have joined the committee, but it still doesn’t have the ArcelorMittals, the Thyssenkrupps, and it’s missing a big steel end-user,” said an industry expert close to the LME.
ArcelorMittal is the world’s largest producer of steel while ThyssenKrupp is Germany’s biggest steelmaker.
Another potential headwind for the contracts is the withdrawal of several banks from commodities due to stricter post-financial crisis regulations and dwindling returns.
“Having a competent market maker is key in the short term. However, for a contract to endure you also need a mix of steel mills, end users, speculators and crucially, you need banks and other counter parties,” said James Rilett, managing director of Minerals Value Service.
There are dozens of steel derivatives that are thinly traded or untraded. However, iron ore derivatives - backed from the start by market makers, steelmakers and merchants in China and by big banks - are soaring - and industry experts say it is only a matter of time before the steel market follows suit.
The LME meanwhile remains convinced its steel contracts will gain traction.
“We’re clear that our contracts will have strong market making, so even if the natural balance of buyers and sellers aren’t there, we’ll have market makers willing to take positions,” Matt Chamberlain, head of LME business development, told Reuters.
Two main groups have shown interest: physical traders as well as professional market makers, like Chicago based firms that in some cases also specialise in proprietary trading.
On Tuesday, the LME made it easier for new members, including U.S. “prop shops”, to have direct access to its electronic trading system - a move that gives any potential market maker an affordable, convenient way to trade on the LME. (Editing by Veronica Brown and Susan Thomas)