Reuters
LONDON - Major steel producers remain largely opposed to the idea of steel futures trading, which they believe is fuelling speculation and distorting prices, a Reuters survey found on Wednesday.
But smaller, medium-sized steel mills, which do not enjoy the same pricing power as the majors, support and use steel contracts as it offers them an opportunity to hedge in the face of increased volatility from iron ore and steel prices.
The survey of 11 steel mills worldwide and the American Iron and Steel Association (AISI) taken over the last three weeks showed producers have no plans to use futures contracts as they do not want middle men in their price talks with consumers.
"The further development of derivative markets, which have little to do with real and value-added businesses, are issues which are not close to our heart," said German steelmaker Salzgitter in an emailed response to questions. "It only promotes a casino mentality and speculation," it added.
Salzgitter's opposition was echoed by Germany's largest steel producer Thyssenkrupp while Austria's Voestalpine said it was monitoring the market.
Some mills in the world's top steel producer China use the Shanghai Futures Exchange's (SHFE) rebar futures but political sensitivities and lack of experience in derivatives mean they are unlikely to use other futures markets, the survey showed.
ArcelorMittal, the world's largest steelmaker, which has long dismissed the futures market, declined to comment for this article. On Wednesday, it forecast a sharp fall in earnings in the third quarter.
"You still have some of the big players who don't want to use it (futures) and will probably never want to," said Martyn Whitehead, head of mining and metal sales at Barclays Capital.
"There is a desire to protect the pricing or lack of pricing transparency that exists in the steel market; they are protecting their margins -- why wouldn't they?," he said.
But smaller mills particularly in the Black Sea region, which mainly sell billet, say they welcome the ability to be able to hedge some of their sales.
"We use futures contracts, we use the LME," an executive at a mid-sized mill in Turkey said. "We believe there's a future in this business and it helps us with our cash position," he said.
In addition, banks which trade steel futures highlight the increased activity in hedging by steel industry, particularly after the world's top iron ore miners abandoned the decades-old annual benchmark system in favour of a more flexible mechanism that sets the prices on a three-month basis.
"INCONVENIENT"
In Asia, the world's second and third largest steelmakers Nippon Steel and POSCO respectively, said they did not have any plans to use futures.
Japan's JFE was the only Asian steel producer which said it was monitoring developments on the futures market.
In China, three steel mills including the country's second-biggest Baosteel said they had no plans to trade futures. China's biggest private steel firm Jiangsu Shagang Group, which is already trading on SHFE, also said it had no plans to dip into the LME market.
"The company (Jinan Steel) isn't trading any futures, and the reason is - it is not convenient for state-owned steel mills to trade derivatives," a senior executive at Jinan Steel said.
Experts say the "inconvenience" referred to in the executive's comments derives from the Chinese government's reluctance to allow state-owned companies to take risks on financial markets, especially those overseas.
Lack of familiarity with futures markets is another challenge. "It is still a big problem for state-owned steel companies in controlling risk - lacking experience and enough knowledge on the derivatives," said a senior executive at one of the four Chinese steel mills which participated in the survey.
[Download Full Report]