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Big Take Up of Independently Researched Indices of Steel Prices by Consumers
February 2005
The remarkable upsurge in global steel prices seems to have done very little to advance the prospects of futures trading in steel. A couple of years ago before the explosion in steel prices futures trading was very much on the agenda. Corus's then chairman, Brian Moffat, made a speech at the 2002 International Iron & Steel Institute annual meeting in favour of creating a terminal market in steel. This prompted various parties to investigate how such a scheme might be established. But not much has happened in concrete terms.
The London Metal Exchange came up with a plan to launch three separate steel contracts; but then it decided futures trading in plastics should come first. In New York, the mercantile exchange Nymex which already trades futures in non-ferrous and precious metals has also looked at steel. But a few weeks ago it came to the conclusion that the steel industry is not ready, citing a lack of standardisation in contract terms and product quality.
The steel industry and exchanges may not be ready but an increasing number of steel consumers are prepared to accept an independently researched index, to measure price movements. MEPS published prices are filling the void. Indices of steel product price movements are increasingly being written into contracts between major clients and main contractors. Similar contracts are also formulated between main contractors and their sub contractors. In this way, escalation clauses incorporating appropriate independent steel price indices, minimise lengthy negotiations and time consuming arguments about recent trends. Each of the parties can be confident that the steel price movements, applied to their contract, follow the overall trend in the market for the relevant product types.
The MEPS on line service gives the pattern of steel prices for the nine main rolled steel products in three key regions - North America, Asia and EU. If more detailed analysis, by country, is required then subscribers are referred to the apposite monthly publication. The, low cost, on line service is proving to be extremely popular with steel buyers around the world, who are prepared to accept regional trends as a reference for their payments for steel. For executives wishing to assess future price trends, MEPS also provide regional, twelve month rolling, forecasts for all the main product categories. To illustrate the importance of reliable but readily available steel price indices to the steel consuming sectors, the company has accepted around 2000 new orders for their on-line service in the first ten months of its operation. All this data is based on a twenty one year track record of publishing steel prices.
This may be a way away from futures trading. But with global steel prices close to peaking and maybe approaching stormy weather, those with exposure to the market are increasingly looking for a reliable barometer.
In mid year, after plastics are launched, the LME may dust off its studies of steel. Nymex has not given up on steel and will continue work on trying to design a futures contract. Moreover, in a move apparently related to Nymex's efforts, the Dow Jones organisation launched a US steel price index that could form the basis of a futures contract, or be used as a benchmark for private trading between individual firms. However, most recently, Dow Jones has reportedly been making adjustments to its index to align it more accurately with spot market prices.
This general lack of progress leaves those wishing to hedge against steel price volatility with few options. Over-the-counter swops are available, although they do not appear to be widely used. But, with steel prices more volatile than ever, there is certainly a strong demand for pricing reference-points.
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