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.
Reference prices will be established for Hot Rolled Coil in NAFTA, Europe and the Far East and Billets in Turkey, NAFTA and the Far East.
Today’s decision is the result of a report from the LME Steel Group, which was established in May 2005 to look at the feasibility and desirability of launching steel futures on the Exchange.
Commenting on the announcement, Simon Heale, LME Chief Executive said:
“There is a clear demand for price risk management tools in the steel industry, and steel futures contracts are widely accepted as the solution. In addition, the LME is seen as the preferred exchange for the introduction of such contracts.
This is an exciting step for the LME which will enable the Exchange to bring its experience to a diverse and complex industry and to deliver solutions that are tailored to the needs of that industry. This is another example of progressive thinking from the LME; it follows the launch of two plastics contracts in May, a licensing agreement with MCX announced last week and a further extension of Select, the LME’s electronic trading platform.”
