Increased volatility tests steel trading in futures market in London

It has been a while since the LME the world's number one non-ferrous market, launched trading in steel billet futures.

Martin Abbott, chief executive of the LME, speaking to the Turkish Daily News before the official launch April 28, said the need to "manage volatility" in an unstable marketplace was among the reasons why they dared to venture into steel billet futures trading.

Managing volatility has a vastly different resonance today.

The global financial crisis has wiped trillions of dollars off equity values, taking once-king commodities, everything from oil to coal to wheat to steel, down with them.

Looking for escape, investors have fled to the safety of the greenback and government bonds in the West.

When TDN interviewed Abbott, steel was trading at about $900 a ton, but today it is below $550, having fallen from its all-time high of $1,260 on Jun. 26.

TRADING VOLUME

Amid such volatility, Lotta Ulfsdotter, steel market executive of LME, sounded confident about the performance of the steel exchange.

"Since the launch of our two regional billet contracts, we have traded over 570,000 tons across the next 15 months," she told the TDN in a recent interview.

"The trading volumes are gathering momentum with over 75 percent of transactions taking place since we introduced the trading of ?spot? on July 24. The interest in the LME steel futures has been widespread, in particular in our contracts for the Mediterranean region, Russia, Ukraine, Turkey, Middle East and the like, which accounts for over three-quarters of our trading volume."

GAINING FOOTHOLD IN PRICING

The exchange has also started gaining a foothold in the pricing of steel.

"Market sources suggest that producers and trading companies are starting to price their physical material by using the LME monthly average price as reference," the LME executive said.

"This ... means our contracts are gaining acceptance in the physical industry. To date, 29 producers with a combined production around 45 million tons have registered their billet for potential LME delivery."

Ulfsdotter said price volatility demonstrated the need to engage in steel futures to many people.

"It is clear to the steel industry and its end-user sector, the construction industry, that this unprecedented level of price volatility is almost impossible to manage successfully," she said.

"Subsequently, there has been significant interest in our contracts as the need for futures to manage exposure to price movements has probably been greater than ever before."

Asked about her prediction on prices, she said at the moment it is it "very difficult to predict the extent or velocity of future price movements," due to various factors including the current global crisis.

Steel futures trading also involved Turkey, as the country was picked as one of the four major hubs for LME-approved warehouses.

"Turkish authorities and the LME have a good working relationship," she said. "The Turkish authorities have been helpful and supportive of the LME in Turkey and continue to be so."