BIR AUTUMN CONF: No need for scrap derivatives, Abbott says

Martin Abbott, former ceo of the London Metal Exchange, dismissed the need for scrap futures contracts at a recycling industry conference in Warsaw on Tuesday October 29.

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Speaking at the Bureau of International Recyling (BIR) meeting, Abbott said that derivatives for primary metals should be used as benchmark products for scrap merchants wishing to hedge, rather than scrap futures contracts.

He argued that metals derivatives should be based on homogenous materials, noting that stainless steel scrap traders already use the LME nickel contract to hedge the nickel content of their product.

A rival commodity derivatives trading platform, the Chicago Mercantile Exchange Group (CME Group), launched a US Midwest busheling ferrous scrap contract in September 2012, based on Steel First sister publication AMM’s Midwest Ferrous Scrap Index for No1 busheling.

The first trade on the contract was made on September 10, brokered by Freight Investor Services, with Macquarie Bank acting as a general clearing member.

Abbott, who guided the LME through its $2.1 billion sale to the Hong Kong Stock Exchange earlier this year, suggested that ferrous scrap should be hedged on futures contracts for billet, a semi-finished steel product.

The LME launched its own steel billet contract in 2008, but this has been beset by problems, including issues concernding warehousing queues, shrinking liquidity and a failure to deal with tax issues in Turkey, the biggest market for the semi-finished product.

The CME Group’s Black Sea billet contract, which launched in 2011, has attracted attention from a number of former supporters of the LME contract, including JP Morgan and Stemcor.

Abbott blamed a lack of volatility in physical billet prices for interest in the LME contract falling to record lows.

The futures and forwards markets must be open to “different users with different motives”, he said, adding that “the role of speculators and investors must be recognised because liquidity is absolutely key”.

Asked about his plans following his departure from the LME, Abbott said: “I would love to stay in this [metals] business… I’m not ready to hang up my boots yet.”

But he would consider work outside the metals arena, he added.

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