LME readying to launch three regional HRC contracts in January

The London Metal Exchange will introduce three regional hot-rolled coil contracts at the start of 2019, coinciding with a change in attitude towards risk management tools for the ferrous sector, according to the exchange’s business development manager.

The contracts are aimed at the domestic markets in the United States and in Europe as well as the Chinese export market, said Marko Kusigerski, who is responsible for various strategic initiatives including the new steel contracts.

“We’re getting approval for the whole complex - this is part of the few cash-settled contracts the LME is going to offer,” he told the LME’s ferrous breakfast in New York. “We’re looking for regulatory approval this year and commercial launch at the beginning of the year; there’s no point launching something just before Christmas.”

The specifications for the US contract will be quite similar to those in the LME’s existing steel scrap and steel rebar contracts, Kusigerski said. Final settlement, following termination of the trading for a contract month, will be based on a price reporting agency (PRA) reported price, a slide accompanying Kusigerski’s comments showed.

“We’re going to have a monthly future initially going for 15 months, extended to 36 months in the first half of 2019,” he noted. “It’s going to be cash-settled, it’s going to be 10 metric tonnes, and it will have a very similar kind of strategy as the current contract which means we’ll look at getting market makers, getting prices on screen, getting initial liquidity going from day one.”

The exchange launched its two existing ferrous contracts in 2015; both currently have a 15-month tradeable forward curve. The plan next year is to also extend the forward curve to 36 months, Kusigerski said.

Volumes growing
Since their launch, the scrap and rebar contracts have seen a “really strong increase in terms of trading volumes,” Kusigerski noted, with 5.7 million tonnes of scrap traded compared with 1.1 million tonnes of rebar.

“What’s important for us is that not only do we have an increase in terms of volumes, there’s a consistency in terms of volumes, and in open interest... it’s a really positive development that volumes are growing and are consistent,” he said.

This reflects efforts made by the LME at education and marketing in the ferrous markets, Kusigerski said, as well as a market-maker program giving tradeable prices for 15 months and open interest dating out to June 2019 in scrap, for example.

This marks a significant break from the past few years when companies had little understanding of the concept of futures contracts.

“But things have changed, and proof of the change is the evolution of volumes on the LME and also others as well - for instance, Nasdaq has just launched a futures market; that’s really a positive development,” Kusigerski said.

American Metal Market's Midwest shredded steel scrap index serves as the basis for the Nasdaq Futures Inc US Midwest shredded scrap futures contract.
 
American Metal Market is part of Metal Bulletin Group, whose prices underpin several metals futures contracts worldwide, including the Chicago Mercantile Exchange’s copper cif Shanghai futures contract and the exchange’s duty-unpaid aluminium premium contract. Its Midwest No. 1 busheling index also underpins the CME's US Midwest busheling ferrous scrap futures contract.

Some steelmakers are increasingly vocal about the fact that they are actively using futures, Kusigerski also noted.

“Having a steel mill publicly announcing the benefits of using steel futures is a big step forward,” he said. “Things are different. Things are really different on both the physical side and people’s perception of futures.”

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