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London Metal Exchange launches steel futures trading

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Trading in steel futures has begun on the London Metal Exchange Ring following the successful test phase trading on its telephone and electronic market, LME Select, with the launch of two

Trading in steel futures has begun on the London Metal Exchange Ring following the successful test phase trading on its telephone and electronic market, LME Select, with the launch of two regional steel billet contracts for Mediterranean and East Asian delivery.

Each contract is for 65 tonnes of billet. During recent trading billet prices have been in the region of USD950 per tonne, giving a contract value of more than USD60,000. In volatile markets billet prices have trebled since 2003, driven largely by the global construction boom.

During test phase trading since February 25, almost 500 contracts have been traded on Select and the telephone market with a value exceeding USD27m. The first prompt date for the new contract will be July 28, while Ring trading with a daily cash prompt date out to three months will commence on July 24.

The LME, which has a 95 per cent share of the non-ferrous metals market, believes the launch marks an important shift into a new market. ‘Billet has key commodity characteristics, in that it is a standardised, fungible product with numerous producers and consumers and a strong merchant element,’ says commercial director Liz Milan.

‘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.’

Steel is the second largest commodity market after oil and gas, with annual output currently exceeding 1,300 million tonnes, of which more than 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 USD500bn.

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 prompt date structure for the steel contracts will be identical to LME non-ferrous metals contracts, with prompt dates out to 15 months, as for lead and tin.

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 Incheon, South Korea and Johor, Malaysia.

‘The LME derives its strength from creating contracts which meet the needs of producers, consumers and merchants in the metals business,’ says chief executive Martin Abbott. ‘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.’

The 131-year-old LME is the world’s leading non-ferrous metals market with a volume of almost 93 million lots in 2007, an increase of 7 per cent from the previous year and with a monetary value equivalent to USD9.5trn.

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