Supply Excellence — Steel Industry Trends in 2009 (Part #3): Steel Futures

Steel Industry Trends in 2009 (Part #3): Steel Futures

September 5th, 2008 · by Mike Petro · No Comments · LCCS and trade, best practices, sourcing, supply management

So far the steel industry trends to watch next year have been extensions or acceleration of current conditions - Industry Consolidation and Vertical Integration. Both are extremely important for buyers to monitor since they have short and long term impacts on steel price and supply. But our third trend to watch in 2009, Steel Futures, is much more of an unknown, thus leaving most industry watchers in a “Wait and See” posture.

One of the most heated debates among steel suppliers, buyers, and analysts is the introduction of steel futures markets. Steel futures, which would allow buyers and traders to hedge against future steel prices, have been traded on the London Metals Exchange since late April, are set to launch on NYMEX in Q4, and appear to be close to launch on the Shanghai Futures Exchange. Proponents of steel futures claim the futures markets will provide much-needed pricing visibility and reduce the risk of steel price volatility by allowing for long-term fixed price contracts for buyers.

Opponents to the use of steel futures claim the presence of futures markets will actually increase volatility by allowing pricing to be manipulated by financial institutions rather than buyers and sellers of physical steel. The opposition’s opinions are perhaps best summarized by two quotes that were made during a debate about the usefulness of steel futures at the recent AMM and WSD steel conference (paraphrased):

Lakshmi Mittal, Arcelor-Mittal: “Steel is not strictly a financial instrument and should not be managed as such.”
Keith Buse, SDI: “Until suppliers are willing to participate on futures steel hedging by supporting physical shipments, then steel futures will continue to be a financial game played by young Harvard graduates.”

Despite the once widely held belief that steel futures would never come to fruition, there is no arguing the fact that steel futures are now on the scene in the steel industry and will be in place for the foreseeable future. The overriding question remains: Will steel futures be a viable instrument for steel sourcing?

The general consensus I’ve heard from many steel buyers is that steel futures will have to prove itself over time to be a viable pricing entity before the use of steel futures has any significant influence on actual steel sourcing strategies.

*** This post is based on my feature article, Steeling Your Profits, in this quarter’s issue of SupplyWatch. The full article is here and you can sign up for a free subscription to the electronic version in the top right corner of this page. ***

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Services Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel and Timken Latrobe Steel.

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