BaseMetals.com :: LME Group - LME steel billet contract gaining traction, volumes rising

Istanbul, 31 May 2010 - Turnovers and open interest are growing in LME steel billet futures as the contract gains acceptance within the industry, and hedging possibilities are seen possible for the steel scrap sector, going forward, exchange CEO Martin Abbott said on Monday.

"We believe that steel billet will become the hedge instrument for the steel scrap industry as copper and aluminium are (for scrap)," he said at the BIR Convention here.

This year in particular has seen steel billet futures become more attractive and used wider, as perhaps the producing industry, which may have hoped the contracts would wither, has had to change its stance.

Steel futures were launched on the LME in February 2008 with two billet contracts - Far East and Med - which will be merged in a couple of months to create a global contract. Since the launch up to 5.8/5.9 million tonnes have been traded, Abbott noted.

The Med contract, which saw 270 lots of business in May 2008, has witnessed a volume surge, with the May 2010 turnover up to last Thursday reaching 13,318 lots, he said

"It takes time for companies to get used to it. It hasn't gone away and we have seen a sudden increase in the last three months."

Despite, this the risk-management uptake is still low, compared with LME contracts, such as copper and aluminium.

"Ninety-five percent of the world's copper and aluminium is bought, sold or hedged on the LME. A tiny amount of the world's steel production is bought, sold or hedged on the LME," he said.

Globally, around 630 million tonnes of billet can be said to be 'at-risk' - in long-products the total is 1.2 million tonnes.

"That is a risk that needs to be hedged."

It is not just the product market that can be hedged - there is the potential for steel scrap hedging as well, given the high correlation between LME and physical billet prices. Over a two year period, there is an 85 percent correlation between the accepted CIS Black Sea export price and the LME - 80 percent is needed for accountancy approval.

"We have the correlation to show to an auditing firm that this is a hedgeable price...in time that will become closer." he said.

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