Mixed views on proposed London and Shanghai steel futures markets

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Shanghai left standing as London takes the lead

Mar. 21 – Targeting China’s producers and traders, the London Metals Exchange (LME), the world’s largest trading house of non-ferrous metals, has announced it will go live next month to sell futures contracts in steel

The announcement has confounded plans by the Shanghai futures exchange to sell the same product. The LME says that steel futures are necessary to increase price transparency, control risk exposure and help traders manage cash flows, while at the same time offering traders the ability to profit from differences in the commodity between London and Shanghai, should Shanghai still go ahead with its own steel futures. Locking in future prices will also allow Chinese and other producers to turn steel inventories into cash.

The new trading floor comes at a time when steel prices are being driven upwards by rising costs and huge demand, mainly from China’s construction industry. The global price of steel billet, low grade steel used to make bar for reinforcing concrete structures, has tripled in four years and is now trading at US$840 per ton, up from US$630 in December 2007.

Other traders however were not so sure about the need. CLSA steel analyst Scott Laprise told the South China Morning Post that big mills like Baosteel sell 90 percent of their steel on contract, not leaving much volatility for a futures market.

While the Shanghai futures exchange has remained silent on its plans for steel futures, the LME will launch its steel futures on April 28.

The LME has traded metals for 130 years, and this may have been a factor in the decision to press on with a steel futures market to Chinese producers wary of price fixing in a market that otherwise would have been dominated by Chinese producers and sellers with the global futures trading bourse also based in Shanghai. Sometimes, it appears, trading can be seen as being a little too close to home when capital is required to free up steel inventory assets.