The London Metal Exchange has announced its intention to create the world's first global steel futures contract through merging its existing Mediterranean and Far East contracts in steel billet.
LME steel futures enable the steel industry to hedge against volatility in steel prices. The concentration of liquidity into a single price benchmark with multiple delivery options offers the steel industry the best flexibility in managing price risk. The contract will enable users of the market to swap physical billet warrants between different regional warehouse locations. Additionally, LME approved steel billet holders typically benefit from more favourable levels of finance because they have the potential to deliver into LME warehouses where the warrants created can be held as secure collateral against loans.
Ms Liz Milan commercial director of LME said that "We're extremely encouraged by the way the regional contracts have been adopted by industry as benchmark prices, but the world has changed significantly in the 21 months since we first offered steel billet futures to the market. Since 2008, trade fundamentals have altered dramatically and traditional regional markets have been replaced by a more global trading structure; our global contract will reflect this."
Since launching regional steel billet contracts in April 2008, the LME has seen almost three million tonnes of steel traded on the Exchange with a value of USD 1.3 billion.
The new contract specifications will remain the same as the current regional specifications, which are in many cases completely fungible. The LME is also actively assessing potential new delivery locations in North America, Europe and Asia as well as reviewing applications from producers to register new steel brands with the Exchange. The LME is likely to target an April 2010 launch, but this is yet to be confirmed. Upon launch, all open Far East contract positions and warrants will be transitioned electronically on the first day of trading for the new contract. Futures positions and warrant held in the Mediterranean contracts will not be affected.