LME to appoint at least 5 market makers for new steel contracts

1 October 2015

The London Metal Exchange, the world's biggest marketplace for base metals trade, expects to appoint at least five market makers to provide liquidity for its steel rebar and scrap contracts due to be launched in November.

"I am confident we will have a minimum of five market makers for each of the two contracts," LME senior consultant Christian Schirmeister said on Wednesday. "We have enough applications."

The contracts for rebar, bars used for reinforcing concrete, and steel scrap, are on schedule for launch on Nov. 23 pending final British regulatory approval, he said. Some market makers may be involved in both contracts.

Steel derivatives have failed to make a major impact in recent years, including the LME's own billet future, with large numbers of products hardly traded because of thin liquidity, partly because steelmakers outside China turned their back on them.

The LME is taking the unusual step of appointing market makers for the new contracts to provide an early liquidity stimulus. The exchange had asked for applicants to express interest by Wednesday (Sept. 30).

"We have had applications for both contracts and we are in discussions about the appointments," said Marko Kusigerski, business development manager at LME on the sidelines of a steel event in Frankfurt. "I expect that from the first day of the new contracts we will have tradable prices on the screen."

The LME has not named any potential market makers.

For long-term success, the contracts will need support from major steelmakers, physical traders and institutional investors, analysts say.

"We have interest from the full range of the steel industry including steel producers, steel stockholders, physical traders and steel consumers including construction companies and the financial sector," Kusigerski said. "We now need to turn this interest into involvement, we are optimistic the steel producers will take part."

The contracts are likely to be largely European based but with global involvement including from the United States and Asia, Kusigerski said.

The launch comes at a tough time for the steel industry as steel prices plummet. ST-CRU-IDX

Chinese steel rebar futures fell to a record low on Wednesday as China's slowing economy aggravated overcapacity problems in the country's steel sector, by far the world's biggest, depressing prices.

Britain's second-biggest steelmaker SSI UK said on Monday it will mothball its Redcar plant in England and axe about 1,700 jobs.

"Most of the steel industry does not use hedging tools," Schirmeister said. "But falling prices do create a greater understanding for the need for hedging."