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* LME steel scrap, rebar will at first be Europe-based
* Top steelmakers uninterested, dislike derivatives
* Steel market saturated with illiquid contracts
By Maytaal Angel
LONDON, Oct 20 (Reuters) - The London Metal Exchange (LME) has attracted little support so far for its planned steel derivatives, struggling to overcome limited appetite for steel contracts outside China, including for its own troubled billet future.
The LME said in June it would launch new steel rebar and scrap contracts next year, adding that it was committed to its existing billet future, even as it admitted the contract was not functioning properly.
The exchange, the world’s biggest marketplace for trading base metals, has been under pressure to boost earnings ever since it was bought by Hong Kong Exchanges and Clearing (HKeX) in 2012 for $2.2 billion.
It told Reuters ahead of the metal industry’s annual LME Week industry gathering in London that the cash-settled steel futures will be Europe-based, though it hopes eventually to launch similar contracts in other regions.
But the exchange faces an uphill task, with its reputation burnt by the troubled billet contract, banks withdrawing from the commodities business and steelmakers outside China still reluctant, on the whole, to use derivatives.
“We are not planning to hedge,” said a spokesman for Salzgitter, Germany’s second largest steelmaker. A spokesman for Austrian speciality steel group Voestalpine said financial hedging does not comply with the group’s strategy.
Major European steelmakers ArcelorMittal, Tata Steel and Thyssenkrupp declined to comment, although the sector is well known to be critical of undue price influence from speculators in markets that embrace derivatives.
“It’s not a proper book without the steelmakers,” said Antonio Novi, a director at Levmet, a Monaco-based metals trader that also employs derivatives experts to provide hedging services to industrial companies.
“Of course you need funds, but for them to come in you need liquidity first, and that has to come from the physical market including steelmakers, otherwise you can just go to the casino and gamble.”
The LME’s billet future has not traded since mid-July. Outside this contract, there are dozens of steel and steel scrap derivatives in both Europe and the United States that are currently thinly traded or untraded.
Examples here include the Chicago Mercantile Exchange’s (CME) suite of U.S. and Europe-based steel and steel scrap futures and swaps, and LCH.Clearnet’s Europe-based steel and steel scrap swaps.
Given that backdrop, the LME’s billet futures were always liable to struggle. The futures were physically settled also, and were crippled by long queues to withdraw steel from LME-registered warehouses.
The new contracts, by contrast, will be settled in cash, and the LME believes this will boost their popularity.
“Having cash settled will make it easier. There are companies in the steel chain that I know will use these products,” said Jeff Kabel, chairman of the International Steel Trade Association (ISTA).
He conceded, however, that for the contracts to take off, every part of the industry needs too be on board, including steelmakers, who are these days only dipping their toes into what is by now a fully liquid iron ore derivatives market.
Last month alone, Singapore Exchange (SGX) cleared a record 61.78 million tonnes of iron ore derivatives, up 157 percent from a year ago.
The exchange, however, has been able to over-ride the lack of participation from global steelmakers by attracting Chinese steelmakers, traders and associated investors who do not share their foreign peers’ aversion to derivatives.
Volumes of iron ore traded on the China-based Dalian Exchange since its launch last year have eclipsed SGX volumes by many multiples. The country also boasts the world’s most liquid steel rebar contract, traded on the Shanghai Futures Exchange (ShFE).
With HKEx at its helm, the LME is arguably well positioned to attract players in China to its products. But here again, the exchange’s strategy of first launching Europe-based steel products is being called into question.
“If you launch a Europe-based contract you take away the Asian liquidity spectrum and that’s the only way ferrous contracts can succeed. We wouldn’t use an illiquid LME scrap contract, we’ve got access to onshore products in China,” said a Europe-based steel trader. (Additional reporting by Manolo Serapio Jr in Singapore; Editing by Veronica Brown and Keiron Henderson)