LME Completes Tender Process For Steel Price Compilers

The LME is now beginning the short-listing of price compilers who could work with the Exchange to develop and publish LME steel reference prices for at least six benchmark steel products. The decision on the chosen compiler(s) will be announced in the second quarter of 2006 and is part of the process through which the LME will develop price risk management tools for the steel industry.

Reference prices could be established for Hot Rolled Coil in NAFTA, Europe and the Far East; and Billets in Turkey, NAFTA and the Far East. If, after a year, these prices have gained credibility within the steel industry and the LME membership, the Exchange will take a decision on whether to launch steel futures contracts.

Commenting on the announcement, Simon Heale, LME Chief Executive said:

“I am impressed by the quality and quantity of the response that we have received during this tender process, and I am confident that we will be able to establish, and publish, a range of credible reference prices for the steel industry.

”We are on track to complete this part of the process which demonstrates the Exchange’s commitment to develop risk management tools that will ultimately bring clear benefits to all parts of the steel supply chain.”

Background:

1. The process for launching steel futures contracts will be broken down into three key stages:
   a. Stage one involves inviting tenders from reference price compilers. The chosen complier(s) will work with the Exchange to establish and publish a credible LME reference price.
   b. Stage two will be to evaluate, after a year or so, whether the prices have gained credibility. On satisfaction of this stage the LME will move to stage three.
   c. At stage three the LME Board will decide whether to introduce trading in futures contracts based on the LME reference prices.
2. The LME’s decision to begin the development of risk management tools for the steel industry was announced in October 2005 and is the result of a report from the LME Steel Group, established in May 2005, to look at the feasibility and desirability of launching steel futures on the Exchange.
3. Although the first choice for ensuring price convergence is through a physical delivery mechanism, the challenges and risks of such a system for steel result in the decision that contracts would need to be cash settled, using a reference price derived from physical transactions. As there is currently no credible set of reference prices for steel, futures contracts therefore, can only be launched when an industry-recognised reference price has been established.