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Istanbul: Current high steel prices provide no incentive for producers to hedge risks, leaving newly launched futures badly short of liquidity, and it may be months before a bear market returns to stimulate trade.
Major bourses like the London Metal Exchange (LME) and the Dubai Gold and Commodities Exchange (DGCX) have launched steel futures over the past year with the aim of creating benchmark prices for the $800 billion industry.
But participation has so far been limited, mainly because record prices have given producers unprecedented pricing power over their customers. And with demand for steel robust, producers can sell their products at increasingly higher prices.
"We probably need a bear market," said Michael Overlander, managing director of UK-based Sucden, a major ring-dealing broker at the LME.
He added that the success of a new commodity market is depends on key participants adopting an active hedging or trading strategy.
"For this to happen producers of raw materials would probably need to see the value of their assets falling before they would be inclined to try and hedge their risk," he said.
So far, LME's billet contracts have traded a total of 1,759 lots since the launch of electronic trading at the end of February. LME's well-established three-month copper contract traded over 6,000 lots on Wednesday alone.
In Dubai, daily volumes on the DGCX's rebar futures which rose above 200 lots in December, slipped to 20-30 lots in July.
Record price hikes for key-steelmaking raw material iron ore and coking coal prices more than doubling have pushed steel to fresh highs this year. On the LME, the billet price has risen more than 50 per cent since the end of February.
"The producers are not very interested at the moment, as the price keeps going higher and higher," said Ugur Dalbeler, general manager of Colakoglu, one of Turkey's leading steelmakers, which is also approved by the LME.
"Supply is scarce. The producers can sell at whatever price they want," he said but added: "No market could continue to go up forever. When it starts to come down they will consider using the contracts more seriously."
But the prices are not likely to come down soon.
"We'd say a bear market is some time away for steel, at least 6-9 months," said analyst Neil Buxton at industry consultants GFMS.
Buxton said flat products were slightly more vulnerable to the credit crisis as they were used by more consumer-associated industries such as automotives and white goods, but the demand for long products remains undimmed.
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