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RPT-LMEWEEK-LME musters limited support ahead of steel contract launch

Mon 20th October, 2014 1:54pm
(Repeats with no changes to text) 
    * LME steel scrap, rebar will at first be Europe-based 
    * Top steelmakers uninterested, dislike derivatives 
    * Steel market saturated with illiquid contracts 
    By Maytaal Angel 
    LONDON, Oct 20 (Reuters) - The London Metal Exchange (LME) 
has attracted little support so far for its planned steel 
derivatives, struggling to overcome limited appetite for steel 
contracts outside China, including for its own troubled billet 
    The LME said in June it would launch new steel rebar and 
scrap contracts next year, adding that it was committed to its 
existing billet future, even as it admitted the contract was not 
functioning properly.  ID:nL5N0OX4OT  
    The exchange, the world's biggest marketplace for trading 
base metals, has been under pressure to boost earnings ever 
since it was bought by Hong Kong Exchanges and Clearing (HKeX) 
 0388.HK  in 2012 for $2.2 billion. 
    It told Reuters ahead of the metal industry's annual LME 
Week industry gathering in London that the cash-settled steel 
futures will be Europe-based, though it hopes eventually to 
launch similar contracts in other regions. 
    But the exchange faces an uphill task, with its reputation 
burnt by the troubled billet contract, banks withdrawing from 
the commodities business and steelmakers outside China still 
reluctant, on the whole, to use derivatives. 
    "We are not planning to hedge," said a spokesman for 
Salzgitter, Germany's second largest steelmaker. A spokesman for 
Austrian speciality steel group Voestalpine  VOES.VI  said  
financial hedging does not comply with the group's strategy. 
    Major European steelmakers ArcelorMittal  ISPA.AS , Tata 
Steel TISC.NS  and Thyssenkrupp  TKAG.DE  declined to comment, 
although the sector is well known to be critical of undue price 
influence from speculators in markets that embrace derivatives. 
    "It's not a proper book without the steelmakers," said 
Antonio Novi, a director at Levmet, a Monaco-based metals trader 
that also employs derivatives experts to provide hedging 
services to industrial companies. 
    "Of course you need funds, but for them to come in you need 
liquidity first, and that has to come from the physical market 
including steelmakers, otherwise you can just go to the casino 
and gamble." 
    The LME's billet future  FMD3  has not traded since 
mid-July. Outside this contract, there are dozens of steel and 
steel scrap derivatives in both Europe and the United States 
that are currently thinly traded or untraded. 
    Examples here include the Chicago Mercantile Exchange's 
(CME) suite of U.S. and Europe-based steel and steel scrap 
futures and swaps, and LCH.Clearnet's Europe-based steel and 
steel scrap swaps. 
    Given that backdrop, the LME's billet futures were always 
liable to struggle. The futures were physically settled also, 
and were crippled by long queues to withdraw steel from 
LME-registered warehouses. 
    The new contracts, by contrast, will be settled in cash, and 
the LME believes this will boost their popularity. 
    "Having cash settled will make it easier. There are 
companies in the steel chain that I know will use these 
products," said Jeff Kabel, chairman of the International Steel 
Trade Association (ISTA).     
    He conceded, however, that for the contracts to take off, 
every part of the industry needs too be on board, including 
steelmakers, who are these days only dipping their toes into 
what is by now a fully liquid iron ore derivatives market. 
    Last month alone, Singapore Exchange (SGX) cleared a record 
61.78 million tonnes of iron ore derivatives, up 157 percent 
from a year ago.  
    The exchange, however, has been able to over-ride the lack 
of participation from global steelmakers by attracting Chinese 
steelmakers, traders and associated investors who do not share 
their foreign peers' aversion to derivatives.  
    Volumes of iron ore traded on the China-based Dalian 
Exchange   DCIOcv1  since its launch last year have eclipsed SGX 
volumes by many multiples. The country also boasts the world's 
most liquid steel rebar contract  SRBcv1 , traded on the 
Shanghai Futures Exchange (ShFE).  ID:nL4N0J33MI  
    With HKEx at its helm, the LME is arguably well positioned 
to attract players in China to its products. But here again, the 
exchange's strategy of first launching Europe-based steel 
products is being called into question. 
    "If you launch a Europe-based contract you take away the 
Asian liquidity spectrum and that's the only way ferrous 
contracts can succeed. We wouldn't use an illiquid LME scrap 
contract, we've got access to onshore products in China," said a 
Europe-based steel trader. 
 (Additional reporting by Manolo Serapio Jr in Singapore; 
Editing by Veronica Brown and Keiron Henderson) 
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