August 21, 2017 / 11:23 AM / a month ago

Conservative steel mills warming to LME steel contracts

LONDON (Reuters) - Many steel mills, which had largely shunned using steel futures, are becoming more open to hedging and have been experimenting with London Metal Exchange (0388.HK) contracts in recent months, an LME executive said on Monday.

The LME’s steel scrap and rebar contracts have steadily gained volumes since their launch in November 2015, but traders and merchants had been the most active users.

Some steelmakers had argued that bringing speculators into the market would cause disruption.

Before the LME contracts were launched, Voestalpine (VOES.VI), SSAB (SSABa.ST) and Salzgitter (SZGG.DE) told Reuters they would not be using the contracts, while others such as Germany’s ThyssenKrupp (TKAG.DE) had said they would take a wait-and-see approach.

Attitudes have been changing, said Alberto Xodo, deputy head of LME ferrous.

“There has been a fundamental shift in the attitude of steel mills,” he told the Reuters Global Base Metals Forum.

“In recent months our client base has expanded to include even the more conservative participants of the value chain, like the steel mills.”

August is set to mark record volumes, with 229,110 tonnes of scrap and 50,600 tonnes of rebar traded in the first half of the month.

Those half-month tonnages for August were close to the full month totals for July, which were 259,040 tonnes of scrap and 52,210 tonnes of rebar.

The July volumes represented a surge of 42 percent and 66 percent respectively from June.

MILLS TESTING WATER

The success of the LME contracts is in stark contrast to the previous LME physically-delivered steel billet contract, which the LME scrapped in April after failing to trade since June 2015.

One reason the new contracts have gained momentum is because they are monthly and cash-settled.

The rising steel volumes also run against the tide of lower average volumes at the exchange, which declined 6 percent in the first half after falling 7.7 percent last year, partly due to hikes in fees.

Benchmark ferrous contracts in Asia, with millions of lots traded daily, have been very volatile as the Chinese government seeks to impose capacity limits to tackle pollution.

“Given the very high volatility of steel prices in recent years, many of them (steel mills) are now exploring ways to integrate hedging in their operations,” Xodo said.

“We have already seen mills from several countries making enquiries around hedging steel prices with LME futures and many are even dipping their toes by doing test trades.”

In June, Chief Executive David Stickler of privately-held U.S. company Big River Steel told a conference the firm was able to offer customers long-term fixed prices by locking in profits by using futures and hedges, according to a presentation.

Xodo said the LME had received requests to launch other ferrous contracts, especially in hot rolled coil, and this was included in a wide-ranging LME discussion paper. The results of the discussion paper are due to be released next month.

Reporting by Eric Onstad, editing by David Evans

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