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Trading in steel futures commenced on the London Metal Exchange Ring today following the successful test phase trading on its telephone and electronic market, LME Select.
Two regional steel billet contracts have been launched, for Mediterranean and Far East delivery. Each contract is for 65 tonnes of billet. During recent trading billet prices have been in the region of $950 per tonne, giving a contract value of over $60,000. In volatile markets billet prices have trebled since 2003, driven largely by the worldwide construction boom.
The 131 year old LME has a 95% share of the non-ferrous metals market, and this launch marks an important shift into a new market for the Exchange. Commercial director Liz Milan commented, “Billet has key commodity characteristics, in that it is a standardised, fungible product with numerous producers and consumers and a strong merchant element. We have worked closely with all these groups to produce a contract which meets their requirements and which will bring transparency, reference pricing and risk management to this important market.”
During test phase trading, since February 25th, almost 500 contracts have been traded on both Select and the telephone market with a value in excess of $27m. From today the first prompt date for the new contract will be July 28th. On the 24th July Ring trading with a daily cash prompt date out to 3 months will commence.
Steel is the second largest commodity market after oil and gas. Current annual steel output exceeds 1,300 millions tonnes. Of this over 500 million tonnes is steel billet. Billet is produced largely from scrap and mainly used in the construction industry as reinforcing bar. Annual industry turnover exceeds $500 billion.
The LME contract model for steel mirrors that for non-ferrous, which allows for the option of physical delivery to or from LME authorised warehouses, although historically less than half of one percent of non-ferrous contracts are settled in this way. The option of physical delivery ensures that the LME and Physical market price remain aligned. The LME authorises producer brands that are then good for delivery into LME authorised warehouses. The Mediterranean contract currently has 17 approved brands and delivery points in the Marmara region of Turkey and in Dubai. The Far East contract has 17 approved brands and delivery points in Malaysia and South Korea.
Chief Executive Martin Abbott noted, “The LME derives its strength from creating contracts which meet the needs of producers, consumers and merchants in the metals business. We are confident the billet markets will find the LME contracts a useful and valuable tool which will in due course bring clarity and risk management capabilities where previously there were none. We also look forward to extending the contracts to other regions as required.”
