steel 2008 london metal exchange/media/files/ringsider/steel_ringsider_2008.pdf · london metal...

the ringsiderLONDON METAL EXCHANGE

THE MUST-HAVE MATERIALSteel is vitally important – and increasingly volatile

THE RIGHT TIME FOR FUTURESStemcor gives the case for hedging

STEEL 2008

PLUS: Price forecasts for billet, rebar and metallics Looking ahead in construction The role of a broker Regional views from Asia, Turkey, the Mediterranean and the CIS

LONDON METAL EXCHANGE

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LME Steel Cover 08 Black Boxes 25/4/08 10:13 am

33THE RINGSIDER LONDON METAL EXCHANGE

Contacts

Editor Joanne HartLME editorial consultant Thom LantGroup editorial director Claire ManuelManaging editor Samantha Guerrini Editorial assistant Lauren Rose-SmithSub-editor Nick Gordon

Group art director David CooperDesigner Zac CaseyProduction director Tim Richards

Group sales director Andrew HowardSales manager Jim SturrockSales executive Brian Whelan

Client relations director Natalie Spencer

Publishing director Philip HoultDeputy chief executive Hugh RobinsonPublisher and chief executive Alan Spence

Published by Newsdesk Communications Ltd130 City Road, London, EC1V 2NWTel: +44 (0) 20 7650 1600 Fax: +44 (0) 20 7650 1609www.newsdeskmedia.com

Newsdesk Communications Ltd publishes a wide range of business and customerpublications. For further information pleasecontact Natalie Spencer, client relationsdirector, or Alan Spence, chief executive.

Newsdesk Communications Ltd is aNewsdesk Media Group company.

On behalf of the London Metal ExchangeThe London Metal Exchange Ltd56 Leadenhall StreetLondon, EC3A 2DXTel: +44 (0) 20 7264 5555Fax: +44 (0) 20 7680 0505www.lme.com

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© 2008. The entire contents of this publication are protected by copyright. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means: electronic,mechanical, photocopying, recording or otherwise, without the priorpermission of the publisher. The views and opinions expressed by independent authors and contributors inthis publication are provided in the writers’ personal capacities and are theirsole responsibility. Their publication does not imply that they represent theviews or opinions of the London Metal Exchange or NewsdeskCommunications Ltd and must neither be regarded as constituting advice onany matter whatsoever, nor be interpreted as such.The reproduction of advertisements in this publication does not in any wayimply endorsement by the London Metal Exchange or NewsdeskCommunications Ltd of products or services referred to therein.


Contents

9 WelcomeLiz Milan, LME commercial director

10 Steel futures: an essential guideKey facts about trading on the LME

14 Introducing the LMELotta Ulfsdotter, LME steel business manager, on prices, hedging and delivery

19 The role of LME membersJoanne Hart explains what LME membership means

22 A guide to Ring tradingA photographic guide to how LME open-outcry trading works

24 Market regulation, clearing and governanceHow the LME’s rules and regulations protect investors

29 Look in the warehouseGraham Hawkins analyses how LME-approved warehouses contribute to the success of the Exchange

32 LME steel billet dataAn overview of LME steel market data

34 Hedging your betsThe benefits of an efficient futures market are many and varied. Richard Northedge reports

37 Why now is the right time for steel futuresFutures are a key risk management tool, says Stemcor’s Jean-Luc Fiorenzoni

40 A case in pointHow hedging works

Contents


Contents

42 Be preparedPhil Thornton looks at how to make the best of hedging

47 The truth about hedgingSempra Metals lays common misconceptions to rest

52 The must-have materialMark Wiggett reports on the significance of steel

57 An appetite for billetGavin Montgomery looks at billet market trends

60 Scrap heads higherCalum Baker investigates the rising price of scrap

65 The rebar rollercoasterRebar is volatile, but prices are firm this year, says David Beattie

68 Turkey nears a turning pointJim Banks reports on Turkey’s changing role in the steel market

70 The Mediterranean warms upEconomic growth is an agent for change. Helen Dunne reports

72 Southeast Asia calls for changeSoutheast Asia reaches out to a global market. Bill Condie explains

74 Chinese evolutionJim Banks on the growing influence of China

76 CIS in the fast laneWill the steel market in Russia overheat? Andrew Cave reports

80 Constructive futures Phil Thornton reports on the benefits of steel futures for the construction industry

83 News from the ExchangeA round-up for 2008

85 Onwards and upwardsNew courses for 2008

86 Member directory

91 Useful information

92 LME steel FAQs

93 Glossary

94 Advertiser index


Foreword

Welcome

I AM CONFIDENT THAT

WE ARE BEST PLACED

TO DELIVER THE MOST

EFFECTIVE AND RELIABLE RISK

MANAGEMENT SOLUTION TO

THE STEEL INDUSTRY”“

On the eve of the steel billet contractlaunch, LME commercial director Liz Milan introduces the Exchange’s special edition Steel Ringsider

he LME has been considering steel futures

contracts for some years now, but it is no accident

that it takes time, and a great deal of detailed

consultation with the steel industry and market users,

to arrive at a successful contract specification and

price discovery model.

With the LME’s 131 years of experience in non-ferrous metals,

established relationships with the physical industry and unrivalled physical

delivery model, I am confident that we are best placed to deliver the most

effective and reliable risk management solution to the steel industry.

Steel is the world’s second largest industrial product after oil; it is an

industry of immense global proportions, with diverse products and

applications. It is undergoing radical restructuring, becoming more global,

more efficient and more financially viable. Current market conditions are

resulting in high prices, supply disruptions, increased volatility and general

uncertainty for all concerned.

The market is responding to these issues in a number of ways, with

consumers constantly seeking new ways to mitigate their price risk; from

the negotiation of ‘variable price contracts’ and surcharge mechanisms to

the increasing use of ‘over the counter’ derivative products. Unfortunately,

many of these options also carry a new set of issues and risks.

Support for steel futures contracts has come from many areas of

industry, including producers, rerollers, merchant traders and the

construction industry. There has also been overwhelming backing from

the LME’s member community. This support is also evidenced by the

number of brands which have been approved for delivery against the

contracts, currently totalling 16 (at the time of writing), and including

producers from Belarus, Greece, Malaysia, Russia, Turkey and the Ukraine.

Our educational programme for steel also continues apace. Ongoing

industry support and engagement are vital to the success of the contracts

before and after the launch. We will be continuing our participation in steel

industry events and conferences around the world, building on the success

of our online steel hedging simulator and making it available in other

languages. Full details of our activities for 2008, and more information on the

LME steel contracts, are available at: www.lme.com/steel.

Through our ongoing consultation with the steel industry, we know that

many are crying out for a more transparent method of price discovery and

a reliable and recognised way of managing price risk; leading to better

management of cash-flow and prediction of profits.

The introduction of exchange-traded derivatives will bring all of these

advantages. As the market becomes established, we believe that a futures

market will become as integral a part of the global steel industry as it has

been for the non-ferrous metals industry for over a century.

T

1100 THE RINGSIDER LONDON METAL EXCHANGE

Overview

Steel futures An essential guideFor any organisation new to the concept of futures contracts and exchangeprices, there can be a baffling amount of information to take in and process.In this section of Ringsider, we provide all the essential facts you need toknow about the LME, the steel contract specifications, the role of LMEmember firms, market regulation, physical delivery and market data

Steel brand approvalsAt the time of writing, 16 steel brands have been approved for delivery

against each of the steel billet contracts. Producers with brands listed

include RUE “Byelorussian Steel Works” (BMZ), Hellenic Halyvourgia S.A.,

Ann Joo Steel Berhad, Open Joint Stock Company <<AMURMETAL>>,

Mechel Chelyabinsk Metallurgical Plant OAO, “Frolovsky

Electrostaleplavilny Zavod” (ZAO “Volga-FEST”), Joint Stock Company

“Zlatoust Metallurgical Works” (ZMZ), Colakoglu Metalurji A.S., Diler

Demir Celik Endustri ve Ticaret A.S., Ekinciler Demir ve Celik Sanayi A.S.,

Izmir Demir Celik Sanayi A.S., Yazici Demir Celik Sanayi ve Turizm Ticaret

A.S., CJSC <<Ministeel mill <<ISTIL (Ukraine)>>, OJSC “Alchevsk Iron &

Steel Works” and OJSC “Dneprovsky Integrated Iron & Steel Works”.

With any LME contract the approval of brands is an ongoing process.

Full details of the approved brands and the brand listing process are

available on the LME website at: www.lme.com/what_branding.asp

Warehouse locationsProposed delivery locations for the Mediterranean contract are Dubai,

United Arab Emirates, and Marmara Region in Turkey; for the Far East

contract the proposed delivery locations are Incheon, South Korea,

and Johor, Malaysia.

Online steel hedging simulator launchedThe LME has developed its own online steel hedging simulator. The

interactive hedging tool is designed to help anyone interested in managing

steel price risk to better understand the process of hedging, the benefits

and the financial outcomes of different sector-specific example scenarios.

The simulator enables those from all aspects of the steel supply

chain, including producers, rerollers, the construction industry and

steel merchants, to select their own requirements and to track the

progress of a hedging programme through to its financial conclusion.

It incorporates interactive illustrations of different hedging strategies

and an explanation of key LME trading terms.

The LME steel hedging simulator can be accessed online at:

www.lme.com/simulator

Snapshot - LME steel news


Overview

The prompt date structure for the steel contracts is identical to LME

non-ferrous metals contracts with prompt dates out to 15 months as

for lead and tin.

From 28 April 2008• Trading: Ring, SELECT and telephone

• First tradable prompt date: three month date, 28 July 2008

• Officials/unofficials published for three months and 15 months

• Ring trading times: three Rings – 11.40-11.45, 13.05-13.10 and 15.30-15.35

• Both contracts will trade simultaneously in each Ring

• Future outright and carry contracts will be permissible

• Options and TAPOS will not be allowed initially

Far East steel billet contract specificationBillet specifications according to: • GOST 380-94 Grade 5sp/ps, or

• GOST 380-94 Grade 3sp/ps, or

• GB 20MnSi, or

• GB Q235, or

• ASTM A615/A, 615M-07 Grade 60, or

• BS4449: 2005

Shapes:• 100S - 100mm x 100mm x (5,900mm – 6,000mm)

• 100L - 100mm x 100mm x (11,700mm – 12,000mm)

• 120S - 120mm x 120mm x (5,900mm – 6,000mm)

• 120L - 120mm x 120mm x (11,700mm – 12,000mm)

• 125S - 125mm x 125mm x (5,900mm – 6,000mm)

• 125L - 125mm x 125mm x (11,700mm – 12,000mm)

• 130S - 130mm x 130mm x (5,900mm – 6,000mm)

• 130L - 130mm x 130mm x (11,700mm – 12,000mm)

• 150S - 150mm x 150mm x (5,900mm – 6,000mm)

• 150L - 150mm x 150mm x (11,700mm – 12,000mm)

Length Tolerance (+/- 0.5%)

Each lot shall be made up from one shape and specification only.

Brands:All steel billets delivered must be from the production of those brands

named in the LME-approved list.

Lot size:Warrant lot sizes: 65 tonnes (+/-2%).

Delivery:In LME-listed facilities.

Initial delivery locations: Incheon, South Korea, and Johor, Malaysia.

Trading structure – key dates

Contract specificationsMediterranean steel billet contract specificationBillet specifications according to:• GOST 380-94 Grade 5sp/ps, or

• GOST 380-94 Grade 3sp/ps, or

• GB 20MnSi, or

• GB Q235, or

• ASTM A615/A, 615M-07 Grade 60, or

• BS4449: 2005

Shapes:• 100S - 100mm x 100mm x (5,900mm – 6,000mm)

• 100L - 100mm x 100mm x (11,700mm – 12,000mm)

• 120S - 120mm x 120mm x (5,900mm – 6,000mm)

• 120L - 120mm x 120mm x (11,700mm – 12,000mm)

• 125S - 125mm x 125mm x (5,900mm – 6,000mm)

• 125L - 125mm x 125mm x (11,700mm – 12,000mm)

• 130S - 130mm x 130mm x (5,900mm – 6,000mm)

• 130L - 130mm x 130mm x (11,700mm – 12,000mm)

• 150S - 150mm x 150mm x (5,900mm – 6,000mm)

• 150L - 150mm x 150mm x (11,700mm – 12,000mm)

Length Tolerance (+/-0.5%)

Each lot shall be made up from one shape and specification only.

Brands:All steel billets delivered must be from the production of those brands named

in the LME-approved list.

Lot size:Warrant lot sizes: 65 tonnes (+/-2%).

Delivery:In LME-listed facilities.

Initial delivery locations: Dubai, United Arab Emirates, and Marmara Region in Turkey.


Overview

LME-approved steel brands (As at April 2008)

Mediterranean contract

Country Brand Producer Deliverable shapeBelarus BMZ ZHLOBIN RUE “Byelorussian Steel Works” (BMZ) 125L

Greece HELLENIC HALYVOURGIA Hellenic Halyvourgia S.A. 125L / 130L

VELESTINO

HELLENIC HALYVOURGIA Hellenic Halyvourgia S.A. 125L / 130L

ASPROPYRGOS

Malaysia ANN JOO PRAI Ann Joo Steel Berhad 100S / 100L / 120S /

120L / 150S / 150L

Russia AMURMETAL KOMSOMOLSK Open Joint Stock Company <<AMURMETAL>> 125L

CHELYABINSK METALLURGICAL Mechel Chelyabinsk Metallurgical Plant OAO 100L / 150L

ZAO VOLGA- FEST FROLOVO “Frolovsky Electrostaleplavilny Zavod” (ZAO “Volga-FEST”) 125S

ZMZ ZLATOUST Joint Stock Company 120S

“Zlatoust Metallurgical Works” (ZMZ)

Turkey COLAKOGLU METALURJI Colakoglu Metalurji A.S. 130L

DILISKELESI

DILER DILOVASI Diler Demir Celik Endustri ve Ticaret A.S. 125S / 130S / 150S /

125L / 130L / 150L

EKINCILER SARISEKI Ekinciler Demir ve Celik Sanayi A.S. 120L / 120S / 130L / 130S

IDC ALIAGA Izmir Demir Celik Sanayi A.S. 130S / 130L

YAZICI SARISEKI Yazici Demir Celik Sanayi ve Turizm Ticaret A.S. 125S / 130S / 150S /

125L / 130L / 150L

Ukraine ISTIL DONETSK CJSC <<Ministeel mill <<ISTIL (Ukraine)>> 125S / 130S / 150S /

125L / 130L / 150L

ALCHEVSK OJSC “Alchevsk Iron & Steel Works” 100S / 100L / 120S

120L / 125S / 125L

DNEPROVSKY OJSC “Dneprovsky Integrated Iron & Steel Works” 100S / 100L / 120S / 120L /

125S / 125L / 130S / 130L / 150S

Far East contract

Country Brand Producer Deliverable shapeBelarus BMZ ZHLOBIN RUE “Byelorussian Steel Works” (BMZ) 125L

Greece HELLENIC HALYVOURGIA Hellenic Halyvourgia S.A. 125L / 130L

VELESTINO

HELLENIC HALYVOURGIA Hellenic Halyvourgia S.A. 125L / 130L

ASPROPYRGOS

Malaysia ANN JOO PRAI Ann Joo Steel Berhad 100S / 100L / 120S /

120L / 150S / 150L

Russia AMURMETAL KOMSOMOLSK Open Joint Stock Company <<AMURMETAL>> 125L

CHELYABINSK METALLURGICAL Mechel Chelyabinsk Metallurgical Plant OAO 100L / 150L

ZAO VOLGA- FEST FROLOVO “Frolovsky Electrostaleplavilny Zavod” (ZAO “Volga-FEST”) 125S

ZMZ ZLATOUST Joint Stock Company 120S

“Zlatoust Metallurgical Works” (ZMZ)

Turkey COLAKOGLU METALURJI Colakoglu Metalurji A.S. 130L

DILISKELESI

DILER DILOVASI Diler Demir Celik Endustri ve Ticaret A.S. 125S / 130S / 150S /

125L / 130L / 150L

EKINCILER SARISEKI Ekinciler Demir ve Celik Sanayi A.S. 120L / 120S / 130L / 130S

IDC ALIAGA Izmir Demir Celik Sanayi A.S. 130S / 130L

YAZICI SARISEKI Yazici Demir Celik Sanayi ve Turizm Ticaret A.S. 125S / 130S / 150S /

125L / 130L / 150L

Ukraine ISTIL DONETSK CJSC <<Ministeel mill <<ISTIL (Ukraine)>> 125S / 130S / 150S /

125L / 130L / 150L

ALCHEVSK OJSC “Alchevsk Iron & Steel Works” 100S / 100L / 120S

120L / 125S / 125L

DNEPROVSKY OJSC “Dneprovsky Integrated Iron & Steel Works” 100S / 100L / 120S / 120L /

125S / 125L / 130S / 130L / 150S

For full details on the steel contracts, LME member firms and up-to-date steel brands and warehouses visit: www.lme.com/steel


Overview

Introducingthe LME

he LME is unrivalled as the world’s premier non-ferrous metals market

and is used as a reference price by over 98 per cent of the world’s physical

non-ferrous metals trading. It generates an annual turnover in excess of

$9 trillion with traded volumes exceeding 2 billion tonnes in 2007.

Over the last 131 years the Exchange has built long-term relationships

within the metals and financial communities, having successfully provided

transparent prices and a forum for price risk management to the global

metals industry.

This unrivalled experience establishes the LME as the Exchange with the

capabilities, resources and proven relationships within the metals and

financial communities, to deliver credible and market driven risk-

management tools for the steel industry.

Providing a secure and well regulated environment is fundamental to

the success of the Exchange and this applies to the steel industry, too.

The LME has a statutory requirement to ensure that business on its

markets is conducted in an orderly manner; it is a recognised investment

exchange (RIE) providing robust protection to participants. Regulation

of the market is largely carried out by the LME, while the Financial

Services Authority (FSA) is responsible for regulating the financial

integrity and conduct of LME members’ business.

While the LME is based in London, it has a global reach and perspective

Lotta Ulfsdotter, steelbusiness manager, introducesthe LME and explains its threecore services of pricing,hedging and physical delivery T

THE HISTORY, STRUCTURE

AND OPERATIONS OF THE

LME ARE UNIQUE BY COMPARISON

WITH OTHER FINANCIAL

EXCHANGES AND MARKETS”“


Overview

through its member firms, which are the only organisations able to trade

directly on the Exchange, and which provide specific tailored services to

clients who wish to use the LME. Trading spans all geographies, and deals

are brokered by members 24 hours a day, either in the Ring by open-outcry,

by inter-office telephone or electronically via LME Select. As well as

Europe, the LME is well positioned to cover the trading zones of the US and

Asia through its position in London.

The history, structure and operations of the LME are unique by

comparison with other financial exchanges and markets. This uniqueness

is based on the strong relationships that have been developed with the

non-ferrous metals community. Building on this success, the Exchange is

working closely with the steel industry to provide a valuable service to this

community, which currently has no risk management tools.

Three core servicesThe LME principally offers three core services of pricing, hedging (or, as it

is sometimes known, ‘price risk management’) and physical delivery. These

core services underpin all LME contracts and integrate seamlessly with

one another to provide an effective risk management forum.

PricingOne of the key functions of the LME is the discovery of prices that industry

can use as a reference when pricing physical transactions. This practice is

already well established in the non-ferrous metals industry.

The LME does not control or fix the prices that it publishes, nor does it

seek to. LME prices are the result of daily trading activity on the Exchange

channelled through the LME’s member firms and, therefore,

representative of real transactions between buyers and sellers.

The LME has no interest in whether prices are high or low; its primary

concern is that they are discovered in an orderly and transparent manner,

in accordance with the Exchange’s strict market regulation.

In its simplest form the LME’s function is to help to find the price at

which one party is prepared to buy, and the price at which one party is

prepared to sell. One of the most significant differences with an LME price,

compared to a poll-based price reference currently used by the steel

industry, is that LME prices are based on real transactions, not simply on a

perception of where prices are or might be in the future.

Another key feature of the LME is the concentration of liquidity.

Liquidity simply means the number of buyers and sellers in the market. The

most accurate price discovery generally involves the greatest number of

buyers and sellers, as this is representative of the supply and demand

dynamics for that particular commodity. This is especially so if it is linked to

physical delivery.

Hedging or price risk management Hedging is the process of offsetting the risk of price movements in the

physical market by locking in a price for the same underlying commodity in

the futures market.

When hedging, an organisation is able to lock in an acceptable forward

price. This may mean it forgoes windfall profits, but it also protects the

organisation against unexpected losses and enables it to decide the

amount of risk it is prepared to accept. Hedging can help organisations to

better predict profits by creating certainty over a period of time.

As mentioned previously, hedging is a parallel activity to the physical

purchase or sale of material. The on-Exchange activity does not replace

the industry’s normal channels for the purchase and sale of steel. In the

vast majority of cases it is used simply as a financial tool to manage price

volatility experienced in the physical market.

However, for hedging to be successful, all pricing within the supply chain

should be undertaken using the LME price, to avoid what is known as ‘basis

risk’. This will achieve the most efficient hedge and support the

requirements for hedge accounting standards. A theoretical hedging

scenario is outlined on page 40.

Collateralisation – Receiving a cash value for stock In times of market surplus, or with a stranded parcel of billet, the

merchant or producer can sell and deliver into an LME-registered

warehouse, via an LME member firm. After a process known as

‘warranting’, which usually takes two days, they will receive an

equivalent cash value on the basis of the price as determined through

trading on the LME.

Alternatively, the merchant or producer is able to finance his billet stock

by delivering into an LME-registered warehouse, via an LME member firm.

On delivery an LME warrant is generated for each lot (a lot is equivalent

to 65 tonnes).

An LME warrant is a bearer document of title, globally recognised in the

financial world as a reliable, robust and secure document that banks are

consequently able to use as the basis for collateralised lending.

Price correlation – Ability to offer long-term fixed-price contractsThe LME has extensively researched publicly available price correlations

on CIS, Turkish billet (Mediterranean contract), rebar and scrap, which all

suggest a high level of price correlation over a 10-year period.

Publicly available figures suggest a similar level of correlation can be

found in the LME Far East contract. This level of correlation suggests it

would be possible for producers to hedge scrap purchases against the

LME benchmark billet contract.

Such price-risk hedging potentially allows producers to offer fixed-price

contracts to customers. In specific relation to rebar, the ability to hedge

price risk will enable rerollers to offer long-term fixed-price contracts to

customers in the construction industry, which could create an

opportunity to tender for long-term construction projects well beyond

the current three-month model.

“The LME’s contract will enable companies to fixlong-term deals on the selling side not only in billets,but also on other long products... When futuresstart, it’s going to set a benchmark in the steelindustry which will enable us to sell our productsbased on these numbers and fix our raw materials inthe much longer term,” said Ugur Dalbeler, generalmanager, Colakoglu and president of theInternational Rebar Exporters and ProducersAssocation, Turkey (Source: Metal Bulletin)


Overview

Rebar pricing structure The diagram above illustrates the ability to price rebar using the LME steel

billet price as a benchmark. The sales price for rebar is made up of the LME

benchmark price*, plus any conversion costs, premiums and the profit

required. In the diagram, various costs and producer premiums have been

included. However, any of these can be removed, or others added at the

discretion of the rebar producer. Profit has also been included. Other than

the discovery of the benchmark price, the LME has no involvement in any

of these calculations.

Scrap pricing structure The diagram (above right) illustrates the ability to price scrap using the

LME steel billet price as a benchmark. The sales price for scrap is made up

of the LME benchmark price*, minus a value adjustment. This adjustment

takes account of the difference in value between billet and scrap. The level

of adjustment will be negotiated between the scrap processor and the

billet producer.

In order to calculate the final selling price, the scrap processor will then add

costs, premiums and the profit required to the adjusted benchmark price. In

the diagram, various costs and premiums have been included. Any of these

can be removed, or others added at the discretion of the scrap processor.

Profit has also been included. Other than the discovery of the original

benchmark price, the LME has no involvement in any of these calculations.

Delivery – Aligning the physical market and the LME price The option of physical delivery plays an important role in creating price

convergence between the LME price and the physical market price. The

effectiveness of this mechanism means that if the LME price appears too

high or too low, those in the market will see a favourable pricing

opportunity and make use of the delivery mechanism, ensuring that the

LME price is always in line with the physical market price. The market does

not replace the normal channels for the buying and selling of metal, and

only a very small proportion of contracts actually result in delivery.

Approved brandsAs the LME delivery system relies on a user being guaranteed a specified

quality of material, wherever they take delivery, the Exchange operates a

system which approves brands of steel as good for delivery. Once a brand

has fulfilled the necessary criteria, it can then be registered on the

Exchange and delivered against an LME contract.

Approved warehousesIn order to support the delivery mechanism, the Exchange operates, but

does not own, an international network of warehouses, which work to the

exacting specifications of the LME, regardless of where they are located.

It is the LME’s profound knowledge and experience of international

physical delivery, built up over its 131-year history, which makes it the most

viable of exchanges for a steel contract.

LME warehouse stocks data As a natural by-product of the LME delivery mechanism, the Exchange

publishes, on a daily basis, warehouse stock reports which show deliveries

in and out of LME warehouses, and the number of cancelled warrants.

For non-ferrous metals, the LME’s daily stock reports are used and

relied upon around the world by the physical industry and market

participants, providing a valuable indication, or barometer, of the supply

and demand fundamentals for each metal.

The LME only reports on material on LME warrant, and does not

attempt to record all available material in the market at any given time.

*This is a representation of the LME price for steel billet that is traded and

published by the Exchange

Producer pricing structure- Basic REBAR

Producer pricing structure- Basic SCRAP


Overview

ME members play an integral part in the smooth-running of the

Exchange. They are regulated, responsible, reliable and, importantly, they

deal with each other as principals.

According to Mike Hutchinson of Sempra Metals Group, there is a

popular and fundamental misconception that LME members offer and bid

for contracts on behalf of their clients and do so as the client’s agent. But

members deal with each other as principals, not agents, and enter into

contracts with one another in their own names.

“They are responsible for performance of the contract and assume the

risk in the event that their counterparty defaults,” explains Hutchinson.

“It is at the broker’s sole discretion whether to fulfil the order from

his own proprietary trading book; cross it with an opposite order from

another client, or show it to the market and seek bids and offers from

other firms. Clients trade with their broker and not with the market

as a whole. The relationship between a client and his broker is,

therefore, fundamental.”

Broker firms provide access to the market and the delivery

mechanism, which means users of the Exchange can be reassured that

they are dealing with professional, experienced trading firms that are

regulated for capital and conduct of business. The market is regulated

by the LME, while the Financial Services Authority (FSA) regulates LME

members’ business.

The role of LME members

MEMBERS DEAL WITH

EACH OTHER AS

PRINCIPALS, NOT AGENTS,

AND ENTER INTO CONTRACTS

WITH ONE ANOTHER IN

THEIR OWN NAMES”“

LThe LME has differentcategories of membershipbut they each perform avital role. By Joanne Hart


Overview

There are four categories of trading member on the Exchange: Ring

dealing members, associate broker clearing members, associate trade

clearing members and associate broker members.

Ring dealing, or category 1, members are the only ones who can trade on

the LME’s trading floor, the Ring. But they also trade via the Exchange’s

electronic trading platform, LME Select, and through the inter-office

telephone market. The Ring enjoys particularly high turnover and liquidity,

so enabling more complex transactions to be processed.

Associate broker clearing members are known as category 2 members.

They trade electronically via LME Select and through the inter-office

telephone market, but they cannot trade on the floor and must act through

a Ring dealing member if they wish to take advantage of this forum.

Associate trade clearing or category 3 members do not issue client

contracts or trade in the Ring but they do clear their own business.

Associate broker or category 4 members may issue LME contracts but

they do not trade in the Ring and they are not members of LCH.Clearnet so

they must clear business through a clearing member.

Across the spectrum, brokers are central to the process of ‘price

discovery’, a term used to describe the way the official settlement price is

established. These prices are derived from the most liquid periods of

trading, the five minute open-outcry ‘rings’, which are most representative

of industry supply and demand. The price is determined by the last bid and

offer prices for cash, three-month and 15-month contracts, initially for

steel this will just be three-month and 15-month contracts, before the bell

is sounded to mark the end of that ring period.

When choosing a broker, clients have to decide how much access they

want to the market. This depends on an individual company’s needs,

business model and required level of involvement in day-to-day trading.

Associate brokers cannot make their own prices so their role is to get

the best prices for clients from either Ring dealing or associate broker

clearing members. Their particular role means they introduce new

business to the Exchange, which can be particularly valuable when a

market is at an early stage of development, such as steel billet contracts.

As with any commodity market, there are five key factors that clients

need to bear in mind when choosing a broker – pricing, liquidity, charges,

credit and service. Pricing and liquidity are often considered the primary

considerations in the decision-making process, as any client will want the

best price on a regular basis and will require its broker to quote a narrow

bid-offer spread, ideally in large volumes.

Broker charges can vary initially but as the market develops, rates tend

to level out and a typical commission structure evolves. Ultimately, brokers

are most able to differentiate their offerings to clients in terms of credit

and service.

Most brokers may be willing to extend credit lines to enable margin calls

to be met by clients. The size of the credit line is generally determined by

the status of the client. Multinational companies with excellent credit

ratings are clearly an attractive credit proposition but some brokers

employ in-house credit teams to assess creditworthiness on a case-by-

case basis, so they may be willing to extend credit to smaller firms.

Ancillary services are another crucial factor to consider. These may

include client liaison staff, or account executives, to provide telephone

support on issues such as account queries, or advice on hedging strategies.

Some also provide general market information, including commentaries

on floor prices. Other brokers have in-house research departments,

supplying information on market conditions, price forecasts and other

supplementary data.

As the steel market develops, brokers may compete more fiercely to

attract new clients by offering a variety of specialised services, particularly

to those who are new to the concept of futures markets.

A fully integrated broker, for example, can provide warehousing,

logistics and customs clearance; arrange for physical delivery or take-up of

material in an appropriate location, swap financial for physical positions

and vice versa.

Overall, brokers, or members, provide an invaluable service to clients.

The key point is to choose the one that is most appropriate for you.

(Full listings of all LME member firms are included on page 86 of this

publication.)

Joanne Hart is the editor of Steel Ringsider

THERE ARE FIVE KEY

FACTORS THAT

CLIENTS NEED TO BEAR IN MIND

WHEN CHOOSING A BROKER –

PRICING, LIQUIDITY, CHARGES,

CREDIT AND SERVICE ”“


Overview

Ring trading is the Exchange’soldest method of trading andis so called because the LMEuses a ‘ring’.Trading takesplace in the Ring, which is acircular arena, approximatelysix metres in diameter,located at the LME’s premises in London

MarexMarexMarex ED&F ManED&F ManED&F ManSocgenSocgenSocgen

SucdenSucdenSucden

NewedgeNewedgeGroupGroup

NewedgeGroup

SempraSempraSempra

MF GlobalMF GlobalMF Global

RostrumRostrum

AMTAMTAMT

NatixisNatixisNatixis

BarclaysBarclaysBarclays

MetdistMetdistMetdist

TrilandTrilandTriland

A guide to Ring tradingt the LME, traders sit at

fixed, known locations

around the Ring. The LME

system of fixed locations

clearly helps identification of

the firms engaged in a trade.

At present there are 12 Ring dealing members at

the Exchange.

Ring trading, or open outcry, is central to the

process of price discovery, a term used to

describe the way in which LME official prices

are established.

Prices are derived from the most liquid

periods of trading, with trading sessions timed

to concentrate liquidity, and to be most

representative of industry supply and demand.

The trader is the only individual from the trading

team allowed to trade within the Ring. Traders

are required to be seated throughout the period

of the trading session on the circular red benches.

During the five-minute period for a particular

contract, the traders declare their buying or

selling prices and the prompt date, or dates, in

which they are interested.

This verbal ‘open outcry’ may, in slow times,

just be a clear, declamatory voice, but it is more

typical for a seeming cacophony of shouting

voices to be heard in the Ring. While it seems

impossible to outsiders that the protagonists

can follow who is bidding for what, it is actually

just a matter of practice and experience.

Trader

Clerk

Telephone clerks

Behind each firm’s Ring seat is a place for clerks

to stand, usually two per team. They provide

continuous communication in and out of the

Ring in order to pass orders into the Ring and

receive executions of deals out from their trader.

Hand signals are used to indicate what price

the metal is currently trading at, or what

bids/offers are currently in the marketplace.

In their company’s booths around the outside of

the Ring, telephone clerks use telephones either

to receive orders from a client or to provide a

commentary of the activity in the Ring back to

their offices in London and New York.

A


Overview

Members of the LME’s market

operations team are seated

around the Ring to monitor

trading activity; from here they

feed information to other

members of the team seated

outside the Ring in a special booth,

or rostrum.

The Exchange’s team seated in

the booth receives feedback

from their team in the Ring and

input bids, offers, spreads and

trades made into a computer

system. This information is

instantly fed to LMElive, the

Exchanges real-time data service

and the various news vendor

services, who display LME prices.

LME market operations team


Overview

Market regulation, clearing and governance


Overview

egulation of the market is principally carried out by the LME, while the

UK Financial Services Authority (FSA) is responsible for regulating the

financial soundness and conduct of LME members’ business.

Approved as a recognised investment exchange (RIE), and conforming

to British and other international regulatory requirements, the LME offers,

through price, volume transparency and audit trails, a legally safe forum for

the trade of metals and plastics. LME members also operate in a strict

regulatory environment policed by the FSA.

With a daily prompt date system, the orderliness of the market is

achieved by the operation of a regulatory mechanism known as ‘Lending

Guidance’. This creates an obligation on the holder, or holders, of a

dominant position to lend back to the market at required levels. The

benefit of Lending Guidance is that its requirements and operation are

known in advance and, therefore, provide a significant element of

predictability for users of the market.

Beyond this, both the Exchange and its members are subject to

regulatory controls and input from various UK bodies and government

offices, as well as directives from the EU Commission in Brussels. In

international trading, rules applied by overseas regulatory bodies such as

the CFTC in the USA are also taken into account.

To ensure the observance of these regulations, the LME has a

compliance department under the supervision of the executive director of

regulation and compliance. The sole function of this department is to

deliver, at all times, an orderly and transparent market and, in doing so, it

monitors the market, the trading activity of LME members, and their

clients, down to position sizes of one lot.

ClearingThroughout the bulk of the London business day the LME’s contracted

clearing house, LCH.Clearnet, is operating to clear LME contracts.

A brief description of clearing is as follows: one clearing member

contracts with another clearing member to buy material. Both clearing

members enter details of the trade into the computerised matching

system, which feeds the information to LCH.Clearnet. Assuming both

parties’ entries agree on such details as time of trade, price, prompt date,

contracting parties and volume, the trade is accepted as matched.

BOTH THE EXCHANGE AND

ITS MEMBERS ARE SUBJECT

TO REGULATORY CONTROLS AND

INPUT FROM VARIOUS UK BODIES

AND GOVERNMENT OFFICES, AS

WELL AS DIRECTIVES FROM THE

EU COMMISSION IN BRUSSELS”“

RThe Exchange has a statutoryrequirement to ensure thatbusiness on its market isconducted in an orderly andtransparent manner, providingproper protection to investorsand those looking to manage risk


Overview

LCH.Clearnet assumes a contractual role in these matched trades,

becoming the buyer to the seller and vice-versa, a process known as

‘novation’. Therefore, clearing members are protected from the risk of

business failure by other clearing members for that portion of their

mutual business that is cleared. Non-clearing members’ and clients’

contracts with clearing members are not affected by clearing, they

remain principals’ contracts.

LCH.Clearnet is taking on market risk when it accepts trades into

clearing and it covers that risk by requiring payment of margins, cash

amounts that cover the extent of any losses a contract might show.

LCH.Clearnet looks at all of the positions of a member when calling

margins, as a member may have some positions in profit and others in loss.

They will, therefore, call margins on the basis of the member’s net position.

Margins may be provided in either cash or collateral form: a bank

guarantee is an example of an acceptable type of collateral.

GovernanceThe LME executive committee (EXCOM) is led by the chief executive and is

responsible for the day-to-day running of the Exchange.

The governance structures of the LME provide for a number of

Exchange sub-committees. The function of each sub-committee is to

make recommendations in accordance with their terms of reference.

Where the sub-committee is involved with matters of operation, the board

has delegated to EXCOM the initial consideration, and the power to give

effect, to a number of those recommendations.

The London Metal Exchange Ltd has up to 13 directors. The

composition allows for up to two invited directors with substantial

experience of the metals industry and trade; up to three independent

directors; up to six shareholder representative directors, who are

elected from specific categories of the membership; a trade director

and the LME’s chief executive. The LME Holdings Ltd board is drawn up

in a similar way.

The LME structure for market regulation, clearing and governance

provides a robust system developed over 131 years to ensure an orderly

and secure market for the trade of futures and options contracts for

metals and plastics.

THE LME STRUCTURE FOR

MARKET REGULATION,

CLEARING AND GOVERNANCE

PROVIDES A ROBUST SYSTEM”“

Phys

ical

tran

sact

ion

Financialtransaction

Financial

transactionFin

anci

altr

ansa

ctio

n

Financial

transaction

Financial

transaction

Fina

ncia

ltr

ansa

ctio

n

LME

Clearing(LCH.Clearnet)

Other clients

ConsumerReroller

Prod

ucer

Scrap

process

or

Merchant

Broker

Broker

Bro

ker

Broker Broker

Broker

Physicaltra

nsaction

Phys

ical

tran

sact

ion

Physical

transaction

An illustration of how LME market trading may look with the steel industry


Overview

he LME’s base metals contracts are among the most successful in the

world and the metals industry uses LME official prices as the definitive

pricing reference in more than 98 per cent of all purchase and sale

contracts struck globally. Some people might wonder why this is so and

many would be surprised by the answer. One of the principal reasons

behind the LME’s success is its warehouse system.

Only a fraction of the huge volumes of steel billet traded each year will

ever pass through LME warehouses. Most contracts are executed directly

between producers and consumers, moving along highly evolved supply

chains en route to end consumption. The LME warehousing system does

not replace those existing logistics chains, nor is it intended to. So what is

the point of it? Quite simply, the LME warehouses provide a delivery option

of last resort. The ever present opportunity (or threat) of being able to buy

or sell metal at the current LME price and fulfil that commitment through

the physical delivery of metal into or out of the Exchange warehouse

stocks keeps the LME price in line (converged) with the physical market

price. This underpins industry respect for the prevailing LME price and

breeds price integrity.

Look in the warehouse

ONLY A FRACTION OF

THE HUGE VOLUMES OF

STEEL BILLET TRADED EACH

YEAR WILL EVER PASS THROUGH

LME WAREHOUSES”“

TLME warehouses do not store hugevolumes of steel but they make a vitalcontribution to the success and integrityof the Exchange. By Graham Hawkins

The warehouse issues a unique pile number for every lot and records

all the necessary details in its stock control system. When instructed by

the owner, the warehouse issues the warranting instruction, and its

London agent issues the warrants electronically in the LME’s SWORD

system. This proprietary system provides a real-time database of stock

ownership and movement. It is used to calculate and collect warehouse

rent owing on individual warrants and every warrant is issued and

cancelled electronically in SWORD.

Once warrants have been issued electronically, they are printed onto

the warehouse’s branded security paper as the hard copy of the warrant.

The paper warrants are couriered to the client’s nominated broker and

held to their account. These warrants can then be sold, delivered against a

maturing LME futures short position or held to the owner’s order pending

further instruction.

Taking delivery from the LME warehouseOnce the paper warrants are in free circulation they are kept in the London

depository until they are required for cancellation and delivery. At this

point they are returned to the London agent who stamps them as

‘cancelled’ and cancels them electronically in SWORD. The owner’s release

instruction is then passed by the agent to the warehouse, which holds the

physical material until they receive further instructions from the owner to

deliver the material from the warehouse.

Ensuring the smooth running of the systemThe warehouse is regarded as the gatekeeper to the LME physical

delivery system, only issuing warrants for billet that conform to the

LME rules.

Delivery locations are only approved by the LME in areas of net

consumption, served by minimum levels of logistics infrastructure, such as

container terminals, berths of a minimum draft, highways and rail

connections. The port area has to have ‘freezone’ or ‘bonded’ status too,

which means goods can be stored indefinitely in the warehouse, free from

local inventory taxes or duties, while the steel billet is traded multiple times

in warrant form.

Only LME-approved warehouse companies can operate approved

warehouses. Each facility must pass regular audits by LME staff whose

checklist includes building structure, security and minimum levels of

operating efficiency. These well-established monitoring procedures

ensure high standards are maintained throughout the delivery system.

The warehouse plays a crucial role, therefore, in the proven success of

the LME model. The system provides the industry with an ever present

delivery option of last resort, encouraging convergence between the

physical market price and the LME cash steel price. The daily publication of

warehouse stock movements acts as a barometer of underlying supply and

demand fundamentals and creates an efficient tool for price discovery and

managing price risk.

So, although the volume of steel passing through LME warehouses

represents a fraction of global trade, it provides huge benefits to the wider

industry at large.

Graham Hawkins is group logistics manager at Henry Bath


Overview

Regional contracts for regional marketsTo maximise the realisation of this constant opportunity to deliver

physical metal through the Exchange, LME warehouses are located in key

port locations nearest the areas of net consumption of the metal. Initial

proposed delivery locations for the Mediterranean steel contract are

Dubai, United Arab Emirates, and Marmara Region in Turkey, both key

points in the established supply chain of steel billet exported from the

Black Sea region. For the Far East steel contract, Incheon, South Korea,

and Johor, Malaysia, are listed as the first two delivery locations,

supporting the flow of billet exported predominantly from Chinese mills

through to consumption in Asia.

Having two LME steel contracts acknowledges and serves the existence

of regional pricing in the industry. And these two major markets are better

able to discover their true local market price by having two regional steel

contracts, one for the Far East and one for the Mediterranean.

Physical delivery using the LME warehouse systemIf an organisation is short of steel billet, it can buy LME warrants through an

LME broker at the prevailing LME cash steel price and take immediate

delivery from an approved LME warehouse facility. Conversely, an

organisation can deliver surplus billet into an LME warehouse to create

LME warrants, which it may sell through an LME broker and receive the

current LME cash steel price with prompt settlement.

LME warrants are widely recognised by the international banking

community as financeable documents, so they may be used by producers,

consumers and merchants to raise finance for stock held at LME

warehouse facilities.

Creating an LME warrantThe warehouse is notified in advance by a shipper of the total quantity,

brand, shape and expected shipping schedule. The billets are received

and stored in a secure LME-approved warehouse compound, arranged

in standard lot sizes of 65 tonnes of one shape and one brand. The

billets are physically inspected and the accompanying paperwork is

checked to make sure it complies with LME rules. Each lot is now ready

to be issued with a receipt, or warrant, representing a specific parcel of

steel billets.

HAVING TWO LME

STEEL CONTRACTS

ACKNOWLEDGES AND SERVES

THE EXISTENCE OF REGIONAL

PRICING IN THE INDUSTRY”“


Overview

THE WAREHOUSE IS

REGARDED AS THE

GATEKEEPER TO THE LME

PHYSICAL DELIVERY SYSTEM,

ONLY ISSUING WARRANTS

FOR BILLET THAT CONFORM

TO THE LME RULES”“


Overview

LME steel billet data

Steel billet data published by theLME will be in the same format as that published for existingcontracts, giving users acomprehensive view of the market


Overview

ALL LMELIVE DATA IS

PUBLISHED BY THE

EXCHANGE IN REAL TIME”“

he LME publishes a range of prices, both bid and

offer, and trades on a 24-hour, five-day basis for all

contracts traded – the same system will apply to steel

billet. The inter-office matched trades and trades from

LME Select have been published by the LME since the

soft launch on 25 February; however, this is currently

restricted to electronic trading and inter-office telephone market trading.

The closing prices (evening evaluations) used for margining purposes by

the LME’s clearing house LCH.Clearnet are also distributed daily.

The publication of the LME’s official and settlement prices will

commence with the introduction of Ring (open outcry) trading when

nearby prompt dates become available for trading after the hard launch.

‘Cash’ will be traded in the Ring commencing 24 July 2008. The official

settlement price will be the last cash seller’s (offer) price traded in the

morning steel Ring trading session, and this establishes the price for

settlement of contracts falling due on the cash prompt date. The LME will

also publish open, high, low and closing prices.

Throughout the trading day, several scheduled reports go out in real

time in summary of previous trading days or intra-day periods. These

reports give the market timely intelligence about the structure and

liquidity for any given trading day.

Daily traded volume (turnover in lots) and open interest (market open

interest and Exchange open interest) for both the Mediterranean and Far

East steel billet contracts are currently available. Additional compliance

reports, including warrant banding and warrant holdings and futures

banding, will be available after 28 April 2008, the hard launch date.

The daily warehouse stock movement report, which gives tonnage of

LME contract specification material on warrant moving in and out of LME

licensed warehouse locations, will also be available after the hard launch of

the contract.

If potential users are having trouble getting to grips with market data

published by the Exchange, or just need a reminder, a helpful guide, including

full descriptions of the key market data reports, can be downloaded for free

at: www.lme.com/downloads/Guide_to_LME_Market_Data.pdf.

T All data is published by the Exchange in real time. Licensed LME data

distributors offer varied products, however, with a choice of delay classes

and additional add-on services.

A full list of LME licensed vendors can be found on the LME website at:

www.lme.com/dataprices_distributors.asp. LME market data recommends

potential users contact a few providers and find which one offers them a

package that most suits their individual requirements.

LMElive – Get LME steel data direct from sourceLMElive, the Exchange’s own real-time data service, has recently seen the

addition of steel billet data to non-ferrous and plastics prices and reports.

Now all three LME markets can be viewed in one easy-to-access desktop

application with LMElive. LME data can also be taken on the road, using

LMElive anywhere for data display on mobile handheld devices, such as

the BlackBerry.

The LMElive four-week free trial offer has been extended to steel billet

subscribers so that they can see for themselves the comprehensive view of

all non-ferrous, plastics and steel billet trading on the LME.

LMElive shows the full spectrum of non-ferrous and plastics data and

this will also be the case for LME steel data. Steel Ring trading data, official

and settlement prices, warehouse stocks and full charting functionality will

follow the hard launch of steel.

A sample of the LME steel billet already available

LMElive continues to be enhanced to give unique functionality and display

of the key data and reports. The LME has developed several specific

displays including Select Price Depth, for electronic trading, and

composite pages for all contracts with key data, including latest bid/offer

and trade price, high, low, open prices, volume, warehouse stocks

summary and closing prices – all on one screen.

To have LMElive on your desktop today, sign up with a simple online

registration at: www.lmelive.com.

This data is for illustration purposes only and should not be used in anyother context


Hedging and risk management

s a commodity, steel consumption is second only to oil and demand has

pushed up the price of the metal in recent times. Prices have been volatile,

however, and the threat of recession in the US could see an increase in that

unpredictability as mismatches of production and consumption affect the

market. The launch of a steel futures contract is timely, therefore, as it

allows parties across the supply chain to manage their risk.

Steel manufacturing is a complex process involving many different

parties with different needs. But while steel-mill owners may use futures to

lock in prices, traders and consumers who use the alloy are now able to

protect themselves against fluctuations as well. In fact, hedging does not

just make steel a more appealing metal to use; it can also improve firms’

balance sheets.

Futures contracts allow a company either to buy or sell a commodity at

a future date at a fixed price. A construction company needing steel in a

year’s time could thus start building now, knowing what it will pay when the

metal is delivered. Or a producer might want to hedge his risk by

guaranteeing that he can sell in the future at a specified price. As an

exchange, the LME matches buyers with sellers, but it also offers a market

in which investors take the risk, giving the producers or consumers the

certainty they seek.

Hedgingyour bets AVolatility can be extremely unhelpful, so theintroduction of steel futures should benefit awide range of industry participants.By Richard Northedge



POSSIBLY THE GREATEST

GAINS FROM HEDGING

WILL BE FOR THOSE FORCED TO

CARRY STOCK – THE PRODUCERS

AND MIDDLE-MEN”“The Exchange offers clearing facilities, guarantees of delivery or

payment and warehousing services, too, thus eliminating credit risk as well

as price risk.

Brett Olsher of Deutsche Bank explains: “Hedging is a risk tool for a

volatile commodity. Steel has proved to be a volatile product so, by

hedging, the users will be able to have better visibility of the steel price and

make more prudent decisions on their investments.”

The daily market price set by the Exchange will be beneficial per se

because it gives a transparent reference price that can be used in

negotiations. But steel consumers who participate in the market can gain a

competitive advantage over rivals by being able to quote for fixed-price

contracts, knowing an important element of their cost base is also fixed.

By reducing their exposure, a company may be able to quote keener

fixed prices too, and thus win more contracts. Certainty of supply and

reduced risk exposure should ensure favourable finance terms as well.

Furthermore, companies need not tie-up capital holding reserve stocks of

steel, thus lowering their gearing and interest bill.

The steel contract is in billet, not only because this form of the metal is

traded freely and more closely reflects raw material costs, but because it is

less prone to damage, so making it more likely that the buyer will be

satisfied with its condition. Users of other products, however, such as

rebar, may also use the steel billet contract as a reference for their costs.

Eric Louvert, a senior adviser on metals at BNP Paribas in Geneva, says:

“For a construction company it will give some kind of price protection if

the price increase is very significant.”

The rerollers that process the billet into other forms stand to benefit

from hedging, too. Like steel merchants, they are buying and selling steel

and risk being caught by fluctuating prices and a shortage or surplus of

stock. By locking in a future selling price a merchant can be sure of his

profit; by fixing a buying price he can hope to gain from a rising market.

How much of the risk is hedged is the merchant’s choice.

Possibly the greatest gains from hedging will be for those forced to

carry stock – the producers and middle-men. When prices were rising,

stock appreciated in value, offsetting the capital tied up in holding it. But

volatile prices mean that stock sometimes declines in value and holders

have to worry about further falls. Louvert says: “Traders typically have

relatively weak balance sheets so price shocks can be dramatic for them.

For traders, hedging will be useful.” It is also possible for them to use

hedging to protect against timing differences if the re-sale and purchase

do not coincide.



Producers can restrict supply if prices fall, but they cannot turn off their

furnaces like a tap and need to hold different sorts of steel in different

places, ready to meet demand. Hedging not only protects the price of the

stock, it allows the inventory to be turned into cash or to be used as

security, thus giving greater access to cheaper finance. And just as for

consumers, hedging makes budgeting and forecasting easier and thus

takes the strain off the balance sheet.

Guaranteeing forward sales may even give producers the confidence to

increase capacity if volume in long contracts is sufficiently high. But

Louvert points out the risk of locking in sale prices if the producers’ own

costs are not hedged. “It has to be used by producers that really control

their costs,” he says.

Futures contracts can also be used to swap stocks with those held by

other suppliers so that consumers gain access to the brand they want or to

steel in the location they find convenient. Although most metal contracts

are closed before delivery, the LME’s warehouses mean that stock is

available in times of extreme shortage and these stores also offer a

depository for stock when production exceeds demand, saving mill

owners from financing growing inventories.

Richard Northedge is a columnist for the Sunday Telegraph

HEDGING MAKES

BUDGETING AND

FORECASTING EASIER AND

THUS TAKES THE STRAIN OFF

THE BALANCE SHEET”“



here was a time, not that long ago, when the steel industry’s biggest

problem was over-capacity. In the aftermath of the First World War, steel

assumed a political significance and most countries felt they needed a

presence in the market for strategic reasons. For decades thereafter,

producers were largely state-owned and frequently loss-making.

From the late 1970s, privatisation and productivity began to make their

mark. In the UK, for example, 213,000 people were employed in all areas of

steel production in 1978; now there are fewer than 40,000 but output per

employee has risen from 95 tonnes per year to 300 tonnes per year.

Despite this rationalisation, there was still an excess of supply in the

1980s and 1990s. As late as December 2001, the Organisation of Economic

Co-operation and Development (OECD) was forecasting a need to cut

capacity by almost 100 million tonnes up to 2010, at a time when

production was just 850 million tonnes. Today it is 1.3 billion tonnes.

But the OECD did not anticipate the phenomenon that is China and its

seemingly insatiable appetite for steel. At the time of the OECD report,

steel production in China was 151 million tonnes; today it is nearly 490

million tonnes. In 2001 it accounted for about 18 per cent of total world

Why now is the righttime for steel futures

FROM THE LATE 1970S,

PRIVATISATION AND

PRODUCTIVITY BEGAN TO

MAKE THEIR MARK”“TThe steel community has

changed radically in recent years.Jean-Luc Fiorenzoni of Stemcorbelieves the industry now needs an efficient futures market more than ever



production; today the figure is over 36 per cent. Growth in steel

production over the last six years in China has been over 120 per cent,

compared with the rest of the world where it has been less than 20 per

cent. The rate of China’s growth caught almost every participant in the

steel supply chain on the hop; from raw material suppliers to players in the

distribution chain. The country’s demand for imported raw materials took

off in 2003; prices rocketed and so, too, did the price of finished steel.

Not that steel prices were ever known for stability. In fact, they have always

been fairly volatile. But in recent years, volatility has increased exponentially:

the range of prices has been wider and cycles have become shorter.

Trading flows have changed dramatically – China has moved from

being a net importer of steel to a net exporter. Modern technology

means that almost everyone now has access to information and in the

steel world, too, rumours spread like wild-fire and can influence prices

in both directions.

Right now, it seems as if prices are only going one way – up – and this has

induced a feeling bordering on complacency among some producers. But

the economic environment is less benign now than it has been for years

and the outlook is distinctly unpredictable.

Within this context, risk management tools should not be ignored. Most

participants in the steel industry face some kind of risk on an almost daily

basis. There is freight risk, default risk, quality risk and, of course, price risk.

Historically, companies have tried to mitigate freight risk through

insurance; they have taken out legal or financial contracts to reduce the risk of

default and they have locked in freight rates for three or four years in advance.

But in recent times, they have done little or nothing to mitigate the

biggest risk of all – price. Of course, the industry has been talking about

steel futures for years, but the situation has taken on a particular urgency

as volatility has stepped up a gear and the pricing environment has become

increasingly challenging.

Ironically, it used to be quite common for producers to offer long-term

contracts to end-users, stretching out 12 months, 24 months or even 36

months. But as prices soared, producers became less willing to commit to

such long-term fixed-price contracts. Yet this is just the time when risk

management issues should be front of mind.

Almost every company involved in international trade believes it is

imperative to have an effective currency hedge in place to mitigate its

euro/dollar risk. Yet there has been just 8 per cent volatility between the

two currencies over the past eight years. In the same period, Turkish rebar

prices have gyrated by 24 per cent – and until now, no effective hedging

system has been in place.

Companies have had to take on all the risk associated with buying,

selling and transporting steel, a situation which many have found

operationally unhelpful.

The LME futures contracts are designed to mitigate against this risk.

Some producers have expressed a reluctance to lock in prices but it is

worth remembering that even if this means losing out on some of the

upside, it also acts as a protection against downside movement.

It is worth noting the definition of hedging as well. Hedging occurs when

companies need to mitigate the risk associated with physical exposure to a

commodity. It is a fundamental business activity, undertaken by

corporations around the world.

Before embarking on any kind of steel hedging activity, company boards

can ask themselves a simple question: are investors investing in the

company because it is exposed to steel?

In some cases, the answer may be yes. In many cases, the answer will be

no: investors are investing in their company for a variety of strategic

reasons, which have nothing to do with steel exposure. In such cases,

management teams are almost duty-bound to try and mitigate the risks

associated with volatile steel prices.

The launch of steel futures on the LME is new and different. Calculating

the right way to do it has been a complex and long, drawn out process. One

of the challenges has been created by concerns about whether steel is, in

fact, a commodity, as there are so many grades and varieties of the metal.

The LME has worked around this by focusing specifically on billet, which

represents over 40 per cent of global steel production and has all the

behavioural characteristics of a commodity. Last year the merchant billet

market amounted to around 30 million tonnes out of an estimated 512

million tonnes of total billet production.

In this context, the rationale behind the LME contracts is simple

and logical.

Steel is the most widely used metal in the world and, if defined as a

commodity, it is the second largest after oil. Yet prices are highly volatile so

an effective hedging mechanism would benefit the industry and all its

participants. Knowing at least some future prices will help planning,

budgeting and efficiency.

The contracts may take time to bed down, but ultimately this is a step that

needed to be taken. There will come a time when the industry will not know

how it managed for so long without a formal, regulated futures market.

Jean-Luc Fiorenzoni is head of steel price risk management at Stemcor

IN THE STEEL WORLD,

RUMOURS SPREAD LIKE

WILD-FIRE AND CAN INFLUENCE

PRICES IN BOTH DIRECTIONS”“



HEDGING OCCURS WHEN

COMPANIES NEED TO

MITIGATE THE RISK ASSOCIATED

WITH PHYSICAL EXPOSURE

TO A COMMODITY”“



A case in pointIt is August 2007, a merchant/trader company wishes to place a bid for a fixed-pricecontract with delivery in February 2008. To protect itself against price volatility duringthe time between bid and delivery, it follows the process below:

Financial – LME futures Physical

August 2007: Contacts LME trader and asks for theLME forward price for February 2008. Receives a priceof $500M/t

August 2007: Offers fixed price bid for 5,000tonnes of billet basis, the LME forward pricereceived from LME trader is $500M/t

August 2007: Buys financial contract for 5,000 tonnesof billet for February 2008 at $500M/t

August 2007: Wins contract

February 2008: Sells financial contract for 5,000tonnes at market price, which is then $530M/t

February 2008: Buys and takes delivery of 5,000 tonnesof billet at the market price, which is then $530M/t

Net position:$530 - $500 = plus $30M/tor $2.65 million - $2.5 million = plus $150,000

Net position:$500 - $530 = minus $30M/tor$2.5 million - $2.65million = minus $150,000

October 2007: Negotiates billet supply of 5,000 tonneswith preferred steel supplier for delivery February 2008

NET EFFECT FIXED PRICE OF $500M/t

Financial – LME futures Physical

February 2008: Sells financial contract for 5,000tonnes at market price, which is then $480M/t

February 2008: Takes delivery of 5,000 tonnes of billetat the market price, which is then $480M/t

Net position:$480 - $500 = minus $20M/t or$2.4 million - $2.5 million = minus $100,000

Net position:$500 - $480 = plus $20M/t or $2.5 million - $2.4 million = plus $100,0000

NET EFFECT FIXED PRICE OF $500M/t

It should be noted that if the price was to fall then a loss would be occurred on the LMEtrade, however, this would be offset by a gain on the physical trade, achieving theobjective of the hedge, which was to protect the merchant/trader company against pricevolatility by ensuring a February 2008 price of $500M/t. This scenario is outlined below:

This example scenario illustrates how hedging works

Be prepared



Hedging can be a usefulrisk management tool –but preparation is key tosuccess. By Phil Thornton



orewarned is forearmed,” the Spanish writer Cervantes wrote 400

years ago. It may not have helped his protagonist Don Quixote, but it is the

best advice for companies thinking of taking advantage of the LME’s new

steel futures contracts.

Hedging is a relatively straightforward process but, as with all

commercial decisions, it works best when the ground has been thoroughly

prepared well in advance.

The first step a company must take is to identify the risk that it wants to

deal with. Risks vary greatly in nature and magnitude depending on where

in the supply chain the firm is and whether it is a producer, consumer,

intermediary or investor.

“The important thing is to identify what your risk is. If that’s the steel

price, this contract is here to help you,” says Nick Riley, head of LME sales

at Marex Financial. “Firms will probably already hedge around interest rate

and energy price risks.”

Analysis by Alan Coats, global steel analyst at HSBC Bank, shows that

different companies will react to market changes in different ways.

If, for example, prices were high and rising, a consumer would buy steel

forward as a hedge against further rises. A producer would sell steel

forward while an investor would buy steel futures to make a gain.

Companies coming to the LME to take out a steel contract will need a

broker as there is no other route to market. This makes the choice of

broker a crucially important decision.

The LME can provide a list of brokers but will not advise on which to

select. Ben Thomson, steel trader at Sempra Metals, says the decision

ultimately comes down to the customer’s ability to investigate and

interrogate the candidates to find the perfect match.

Marex’s Riley suggests customers run through a checklist before

selecting a broker. How many resources are they putting into this new

contract? Do they have specialists in steel rather than metals generally? Is

the broker a category 1 Ring dealer, the only group who can trade in the

Ring during open outcry sessions? Does the broker offer an electronic

trading platform that is stable, fast and has good functionality?

“It is important that a client speaks to a broker who has some

experience in the steel market and understands the culture because it is a

different culture from base metals,” Riley says.

Thomson says clients should consider brokers’ credit, the products

they offer, whether or not they trade physical and whether they offer

online trading.

New clients should allow up to a month to open an account with a

broker, simply because of all the documentation involved. “People very

rarely send back all the documents correctly first time,” Riley notes.

Once that is done, customer and broker are ready to discuss the

precise trades that will meet the customer’s need. The watchword here

is disclosure.

“You have to enter that relationship in a spirit of openness,” says

Sempra’s Thomson. Marex’s Riley agrees. “What’s important is to have a

really open dialogue. The questions a broker asks might seem quite

searching but the broker just wants to give the best advice on what they

need to be hedging,” he says.

When the broker has made his suggestions, the customer must decide:

any decisions or trades they make are at their sole discretion.

Thomson urges customers to ensure they are comfortable with their

strategy. “Keep on asking as many questions as you want. You may not

“F

understand everything but you should not make a decision until you can

make it comfortably.”

A new hedging strategy will almost certainly need to be approved by the

client’s board. Steve Hardcastle, head of client liaison for industrial

commodities at Sucden (UK), says brokers will help the customer’s

representative put a strategy together.

“As brokers, we are very keen that everyone involved is comfortable with

the arrangements, so what we normally plan is that a paper would be put

together for presentation to the board and we will help with that,” he says.

The paper will summarise what the hedging contracts aim to achieve,

the detailed strategy itself and recommendations for a reporting

mechanism to put in place for the life of the contracts.

The first aim is to familiarise the board with the objectives and strategy

and ensure they fit with a company’s capital requirements.

The second aim is to ensure that the company has the internal

processes in place to handle the strategy. This includes determining who

can give instructions to trade; the terms of business; any finance that

needs to be put in place; and an understanding of the implications for the

profit and loss account of running a hedging strategy.

This last point is technical but important. While finance departments

may be used to accounting for losses and profits on physical metal, when a

company hedges it takes on a position diametrically opposite to its

physical position. As Hardcastle puts it: “Physical and hedging all form part

of the same book.”

Customers need to remember that while, as with all aspects of life, it is

not possible to eliminate risk, hedging enables companies to minimise the

impact that a risk such as a movement in price will have on their business.

Sempra’s Thomson says: “The LME is not a magic bullet but it can

significantly reduce exposure to fluctuations in steel prices and allow

you to budget for your business – that’s the key to it. It gives you a lot

more flexibility.”

Marex’s Riley uses the same metaphor. “There is no magic formula,” he says.

“It is the identification of the risk that is the crux and then implementing

the best hedging strategy to mitigate that risk.”

Whatever the minutiae of the arrangement, the broker’s priority is to

ensure that the customer is comfortable with the hedging strategy that is

put in place.

“A broker’s business model is to have repeat business and that requires

the client to be comfortable with what they are doing and to see value in

hedging,” says Thomson.

Phil Thornton is lead consultant at Clarity Economics



AS BROKERS, WE ARE VERY KEEN THAT EVERYONE INVOLVED

IS COMFORTABLE WITH THE ARRANGEMENTS”“



rices for industrial, raw materials are significantly more volatile than

those for manufactured items or services. It is tempting to blame this

volatility on the harmful and destabilising actions of speculators, trading

houses and hedge funds, but in reality it is an inherent characteristic of

commodity markets and stems from the way these materials are produced

and consumed. Production processes are capital intensive and consumers

have few readily available substitutes. Neither supply nor demand is very

responsive to a small change in price, so large price swings are required to

force the market into balance.

The lack of flexibility on the production side is the result of several

factors. First, mines, refineries and steel mills are all characterised by

substantial economies of scale, as it is much cheaper to produce metal in a

large plant than a small one. Capacity tends, therefore, to be added in large

chunks, rather than small increments, and this contributes to an

alternating cycle of scarcity and oversupply.

Second, fixed costs are also high relative to variable ones, so it makes

commercial sense to continue operating at full capacity even as prices fall

to quite low levels. Production is only likely to be affected when prices fall

so low that they no longer cover even variable operating costs, at which

point the plant is likely to be shut completely.

PMany misconceptions existabout futures trading.Sempra Metals distinguishesfact from fiction

The truth about hedging



Third, the process of deciding to build a new plant, securing finance,

obtaining regulatory permits, construction and commissioning is subject

to lengthy lead times before the first material is ready to be delivered to

the market. Demand and supply conditions when the material eventually

becomes available are almost never the same as those predicted.

On the demand side, the lack of price responsiveness is principally due

to two factors. The cost of any one raw material is usually only a small

fraction of the total cost of producing a manufactured item. Collectively,

raw materials are often less important than employee compensation,

taxes and a variety of business services. A substantial rise in the price

of one commodity has only a modest impact on overall costs and

profit margins.

For many raw materials, there are limited opportunities to replace them

with cheaper substitutes in the short-term. It takes time to redesign

manufactured products and retool production processes to minimise use

of expensive raw materials or replace them with cheaper alternatives. In

the short-term, manufacturers may have little choice but to keep buying

the same amount of raw material even as its price rises. Only in the medium-

and long-term do opportunities for redesign and retooling increase.

This lack of responsiveness to small price changes means very large

price swings are required to balance the market, forcing plants offline

during periods of excess supply and bringing capacity back online and

rationing demand in the event of a shortage.

Futures contracts provide a means to transfer and manage riskFutures markets aid the process of price discovery and the LME offers

members the chance to meet futures obligations on the prompt date by

delivering, or receiving, physical metal in an Exchange-registered

warehouse. This ensures spot prices in the futures market converge with

real prices in the physical market on the prompt date. The possibility of

physical delivery also ensures that Exchange prices cannot move out of line

with the underlying physical market, since any misalignment will be

eliminated by arbitrage.

As an exchange, the LME performs two further functions that existing

price assessment services cannot. It ensures the behaviour of market

participants is correct and that prices are formed in an orderly manner,

since these are subject to stringent regulation by the Exchange and

Britain’s Financial Services Authority.

THE COST OF ANY

ONE RAW MATERIAL

IS USUALLY ONLY A SMALL

FRACTION OF THE TOTAL

COST OF PRODUCING A

MANUFACTURED ITEM”“



Indeed, the days when exchange prices could be manipulated with

impunity are long gone. Producers, consumers and other market users can

be confident that prices are set in a fair, open and transparent manner and

are not being manipulated by speculators, brokers or anyone else.

Exchanges also provide a mechanism for hedging and transferring risks,

not just discovering prices. Exchange trading offers a multitude of ways to

manage risks or even transfer them altogether to others who are more

willing to take them (in return for an option premium or giving up some of

the benefits from favourable price moves).

Futures trading does not increase volatilityTrading on an organised exchange neither increases nor reduces price

volatility. Prices for exchange-traded commodities (such as aluminium and

crude oil) are no more and no less volatile than those that are not (such as

iron ore). Empirical studies show volatility is unaffected by the

introduction of futures trading. While the introduction of organised

futures trading will help speculators and investors enter the market, their

actions are more likely to dampen swings than worsen them.

The introduction of organised futures trading will also make it easier for

banks, pension funds, hedge funds and other members of the investment

community to enter the steel market. But this should improve liquidity

without exacerbating price swings.

Commodity investors are often characterised as manipulative

speculators whose activities distort the market, moving prices away from

an equilibrium that would otherwise be determined by supply-and-

demand fundamentals alone. But this is an oversimplification that fails to

appreciate the wide diversity of commodity investors, their different

strategies, and their varying impact on the market.

There are, in fact, at least four types of investor. Short-term technical

funds and trend followers use trading strategies based on price charts and

other market information. Their time horizon is fairly short (ranging from a

matter of hours to a few weeks). There is a strong tendency to follow the

herd and trade based on the underlying momentum of the market. They

can exaggerate short-term price moves. As such they match the caricature

of destabilising speculators. But they are not the only, or even the

dominant, force in the market, and their impact tends to diminish over

longer time horizons.

Strategic investment funds exploit price discrepancies and their time

horizon runs from a few months to years. Their objective is to buy

commodities when they are undervalued and sell them when they are

overvalued. They tend to be buyers at the bottom of the price cycle – and

sellers at the top. As such their activities are counter-cyclical and tend to

dampen rather than exacerbate price volatility.

Investment funds look for portfolio diversification. The largest players

of all tend to be pension funds and other institutional investors interested

in putting a small amount of their funds under management into

commodities to diversify and reduce the risks in their overall portfolio.

Their strategy is essentially passive. Rather than investing money in a

commodity and trading actively to maximise returns, they allocate a small

fraction of their portfolio and leave it under passive management. These

funds may have an impact on commodity prices when they enter or exit a

market but generally provide liquidity (by rolling positions forward)

without disturbing prices.



Market-makers make continuous two-way markets in exchange-traded

contracts for clients and market counterparties in return for commission

or order flow to enter and exit their own proprietary trading positions.

Their strategy is essentially the same as strategic investment funds but

their time horizon is much shorter, ranging from a few minutes to a few

days, weeks or months. Market-makers generally take the other side of the

market from their clients (buying when the client wants to sell and selling

when the client wants to buy). They are generally sellers in a rising market

and buyers in a falling one. As such, they tend to provide liquidity and

dampen the price cycle.

With the exception of momentum-based technical funds, most

investors pursue strategies which have a neutral impact on prices or

actually run counter to the cycle. While momentum-based strategies may

distort prices over a very short time horizon, their impact is dwarfed by the

activities of strategic funds, passive investors and industry fundamentals in

the medium- and long-term. Technical funds generate much of the noise

associated with exchange-based trading but have little impact on long-

term average prices.

Producers and consumers can easily avoid problems caused by

momentum trading and short-term volatility by ensuring sales contracts

are indexed to an average of the settlement price over a month, quarter or

year, rather than tied to the price on any one date.

Futures contracts do not ‘commoditise’ productsSteel producers have expressed serious concerns about the possible

commoditisation of the industry following the introduction of futures

contracts. They fear that careful attempts to add value by investing in

research and development, maintaining quality control and nurturing long-

term customer relationships will be swept aside as the industry comes

under relentless pressure to cut costs, regardless of the impact on quality.

They worry that the production of specialist grades tailored to the needs

of certain customer groups and applications will give way to output of an

undifferentiated bulk commodity meeting only the minimum specifications

of the futures contract. The traditional focus on brand, reputation and

quality will be replaced by a lowest common denominator approach.

THE MOST IMPORTANT

POINT TO UNDERSTAND

IS THAT COMMODITISATION IS A

PREREQUISITE FOR SUCCESSFUL

FUTURES TRADING – NOT A

CONSEQUENCE OF IT”“



They also fear that, instead of delivering steel products direct to

customers, producers will deliver into an anonymous warehousing and

distribution system, where their goods will be commingled with the output

of other firms and one product will be as good (or bad) as another. Steel

will become indistinguishable. Competition on quality and customer

service will be replaced by competition on price. Margins will shrink and

there will be a race to the bottom.

While these apprehensions are understandable, they are based on a

misunderstanding of how futures trading works and how the warehousing

system will operate in practice.

The most important point to understand is that commoditisation is a

prerequisite for successful futures trading – not a consequence of it.

Futures markets need liquidity to be successful. In order to achieve this,

several producers must be able to make the product that is deliverable

against the contract, and consumers must be indifferent about parcels of

the same product made by different suppliers, at least to some extent. For

the market to work there must be a high degree of homogeneity at the

outset. That is why there are futures markets in frozen concentrated

orange juice, winter wheat and Treasury bonds, but not in cars, computers

or televisions.

Futures contracts have minimum specifications to ensure different

parcels of the same product are similar. But there is a trade-off when

formulating these minimum requirements. Broad specifications ensure

many different products can be delivered against the contract (minimising

the risk of a squeeze) but reduce its usefulness to consumers

(discouraging take-up by the industry). Narrow specifications reassure

consumers (maximising usefulness) but only at the cost of making it harder

to find deliverable material (and increasing the risk of market manipulation).

So specifications are usually a compromise. To ensure a sufficiently

large physical base for the contract, they normally allow a number of

slightly different product grades with slightly varying characteristics to be

delivered against it.

Some grades are more desirable than others because they have superior

physical characteristics, are more suitable for particular customers or are

in short supply. The market handles these differences through a system of

premiums and discounts to the base price on the Exchange.

Producers who establish and maintain a reputation for quality and

reliability are rewarded with a higher premium for their product. In the

aluminium market, for example, LME traders pay a small (but significant)

premium to obtain material from North American and European

producers, rather than Russian or Chinese brands, even though these may

also meet the minimum specifications to be deliverable against the

contract. In the copper market, Codelco’s quality and reliability ensure the

company’s CCC brand trades at a premium over some other producers.

Consumers who are unconcerned about quality or specific properties

can obtain material at the base price by opening a long futures position,

running it to cash, and taking up whatever material is offered by the shorts

(sellers) through the clearing system. But the material available in this way

is normally the lowest quality and least valuable (since the deliverer

receives only the base price and no premium). Consumers who need a

specific brand, higher quality material, or material in a particular location

will expect to pay a premium in order to obtain it (either to their broker to

find it for them or direct to the producer).


Industry analysis and pricing

lobal production of crude steel achieved another record year in 2007,

according to initial estimates from the International Iron and Steel

Institute (IISI). Global output has grown continuously since 2000, led by

the dramatic surge in China’s steel industry. Total output in 2007 was 1,343

million tonnes, which was 7.5 per cent higher than the previous year. China

produced 489 million tonnes, or 36 per cent, of the global total, an increase

of nearly 16 per cent.

Billet production rose from more than 500 million tonnes in 2006 to

more than 600 million tonnes last year and China was responsible for just

under half this output. This year, consumption growth is expected to be

around 3 per cent worldwide, although appetite from developing

countries will be more robust and China’s demand for billet is predicted to

grow by between 8 and 10 per cent.

Steel is one of the mostsignificant materials producedglobally, both in terms oftonnage and value. It is alsovitally important in almostevery aspect of daily life.By Mark Wiggett

The must-have material

OVERALL, STEEL IS THE

WORLD’S MOST WIDELY

USED STRUCTURAL AND

INDUSTRIAL MATERIAL”“

G



China’s rate of crude output growth was slowing towards the end of the

year, however, and initial estimates suggest that 2008’s production may

increase by just 8 per cent. Excluding China, world output growth was only

3.3 per cent in 2007, and a similar increase is expected in 2008.

CIS countries, where Russia and Ukraine account for 93 per cent of

production, produced 124 million tonnes last year. South America’s output

grew by 6.5 per cent to 48 million tonnes and this region is likely to show

further strong growth in the current year. Asian countries, excluding China,

produced 145 million tonnes in 2007. India grew strongly and overtook

South Korea in monthly production during 2007.

Growth from developed economies has been more subdued. The 27

countries in the European Union produced 210 million tonnes during 2007,

an increase of 1.7 per cent, while Japan produced 120 million tonnes and

output from the US was 97 million tonnes, 1.4 per cent lower than in 2006.

ArcelorMittal is now the world’s biggest steel company and its output in

2007 was just over 120 million tonnes, which is almost 10 per cent of the

global total, and makes it nearly four times the size of its nearest

competitors. Nippon Steel, JFE (both based in Japan) and POSCO of

South Korea each produced over 30 million tonnes last year, while the

recently merged business Tata-Corus is the fifth-largest producer.

These top five companies have less than 20 per cent of global output

and even the top 20 only have around 40 per cent, an indication of the

fragmented nature of the steel manufacturing industry.

What are the applications of steel?Steel is not a single metal. The various alloys of iron and carbon form a

wide range of different materials, produced for end-uses as small as a pin

and as large as an oil tanker.

Overall, steel is the world’s most widely used structural and industrial

material. More than 1,200 million tonnes are consumed each year and over

half is used in the construction industry.

Steel pilings are used to support foundations. Steel beams, columns and

joists form the structural skeleton of multi-storey buildings – joined

together with bolts made from steel. Such buildings may be made of

concrete, but this must be strengthened by steel reinforcement in the

form of bars and meshes.

Structural steels are also used to construct bridges, electric power

transmission towers, and other types of infrastructure.

Transport is the second-largest user of steel. High-strength, corrosion-

resistant steel sheets form the outer skin of cars and commercial vehicles.

Alloy steels of different kinds are used to manufacture vehicle springs, and

components of engine and transmission systems. Tyres are reinforced

with steel wire.

Railways are steel-intensive transport systems – from the rails themselves

to the wheels and structures of the trains and to the trackside towers that

support the power lines. Shipbuilding activity is booming at present, and

many tonnes of steel plate are used in the manufacture of ships.

The engineering industry is a substantial user of steel, too, and in the

energy industries, steel pipes are used for drilling oil and gas wells, and for

pipelines to carry these products over long distances.

Most people come into contact with steel in various forms on a daily

basis. Tinplated steel sheets make the cans that contain food and drinks, as

well as aerosols, paints and chemicals. Stainless steel – alloyed with

chromium and usually nickel for corrosion-resistance – is used in kitchens,

restaurants and hospitals for its hygienic qualities. It is often said that just

about everything we use is either made from steel, or made using steel.

International trade flowsGlobal steel exports (covering semis, long and flat products and tube) are

estimated to have increased in 2007 by around 6 per cent year-on-year to

approximately 300 million tonnes, according to the UK-based Iron and

Steel Statistics Bureau. This figure excludes intra-European Union trade,

which exceeded 120 tonnes last year.

Industry estimates suggest that billet shipments were between 25 and

28 million tonnes, a modest decrease on 2006 shipments, as the main

producers absorbed more domestically. The Ukraine, Russia, China and

Turkey were among the biggest exporters.

Total exports from China rose by a third to about 65 million tonnes,

while those from the rest of the world were unchanged at about

230 million tonnes. Exports fell year-on-year from the European Union,

Russia, Ukraine and Brazil. European Union exports fell by 1 per cent to

an estimated 32 million tonnes; those from Russia were down 6 per cent

to about 29 million tonnes, while from Ukraine, they fell by 1 per cent to

30 million tonnes. Brazilian exports declined 17 per cent to just over

10 million tonnes.

Exports from the US rose 14 per cent to 10 million tonnes. Turkish

exports, too, are believed to have increased by 10 per cent to roughly

14 million tonnes. The EU, South Korea and the US were also significant

importers. EU imports rose by just under a third to about 50 million tonnes

and US imports fell by a quarter to around 30 million tonnes.

Imports into the Middle East were sharply up. Estimated shipments into

the region were about 38 million tonnes, some 40 per cent up on 2006.

Looking ahead, China’s role in the world market is likely to decrease

marginally, reflecting the impact of government export taxes, the threat of

anti-dumping actions, higher raw material costs and slower growth in

crude production. Some export taxes were further increased in early 2008.

Steel Business Briefing is forecasting a decline in China’s exports of

about 25 per cent to about 50 million tonnes in 2008. This may be offset by

production increases elsewhere in the world.

Mark Wiggett is editor of Global Market Outlook, Steel Business Briefing



Global crude steel production long-term growth pattern, 1950-2007



n terms of tonnes produced, the world steel industry is more than 15

times larger than the other major metals industries combined. On a value

of production basis, it is more than twice the size of the other major metals

industries. And, without exception, it is growing faster.

Billet – a semi-finished form of steel used for rolling long products such

as bars, structural steels and wire rod – accounts for an annual average of

48 per cent of world semi-finished steel output. In line with the steel

industry in general, billet consumption and production has shown strong

growth in recent years. Indeed, since 1996, global billet production has

expanded at a compound annual growth rate of 6.1 per cent, reaching

more than 600 million tonnes in 2007.

The vast majority of billet is produced for ‘captive consumption’, in the

sense that it is consumed on-site at a steel mill through the production, or

‘rolling’, of finished long products. However, some of the billet produced

by steel mills is then sold on the merchant market to long products

manufacturers, who may not have the capability to produce their own

billet. These long products manufacturers, who re-heat the billet to roll

into finished products, are known in the industry as ‘rerollers’.

The merchant market can be divided into domestic and international.

While there is no definitive measure of the volume of billet traded

domestically, intra-country trade at a global level amounted to around 90-

95 million tonnes in 2007. International billet trade is more transparent and

amounts to around 30 million tonnes per year.

Trade tends to be focused on certain key regions that have dominant

INTERNATIONAL

BILLET TRADE

AMOUNTS TO AROUND

30 MILLION TONNES

PER YEAR”“IThe billet market has

expanded significantly inrecent years, prices havesurged and volatility hasintensified.This pattern looksset to continue this year.By Gavin Montgomery

An appetite for billet

exporters and importers. The new LME steel futures contracts will capture

the regional merchant billet trade in the Mediterranean and the Far East.

MediterraneanDemand for billet in the Mediterranean region has been particularly strong

in recent years. In the Middle East, consumption of billet has grown from

around 5.1 million tonnes in 1996, to 13.5 million tonnes in 2007 – expanding

at a rate of 9.2 per cent per annum. Billet demand in Turkey has also been

rising sharply. Turkish billet demand grew from 10 million tonnes to 15.9

million between 2001 and 2007 – a compound annual growth rate of 8 per

cent. Moving westwards, demand in North Africa has also been on the rise

recently, while both Italy and Spain have been major consumers for a

number of years.

The principal driver for all this growth is the construction market. Billet

is the source material used to make steel long products and the largest of

these long products, in terms of volume, is reinforcing bar, commonly

known as rebar. Other products include wire rod, merchant bar and

structurals, and the primary end-use of all of these long products is the

construction industry. As such, construction activity tends to drive long

products demand, which in turn drives demand for billet.

Many areas of the world are not self-sufficient in terms of supply. A

number of long products rerollers in the Mediterranean region rely on

the merchant market for billet inputs. By far the biggest supplier of

billet to the area, and indeed the world, is the Commonwealth of

Independent States (CIS) group of countries. In 2006, the CIS exported

approximately 13.9 million tonnes of billet – equivalent to 46 per cent of

the total merchant billet traded internationally that year. The top five

destinations for Ukrainian billet in 2007, for example, were Egypt, Italy,

Turkey, Jordan and Saudi Arabia.

Far EastDemand for billet has also been surging in the Far East. As the world’s single

largest producer and consumer of steel, it is no surprise that demand for

billet in China has shown impressive growth, rising from 61.4 million tonnes

in 1996 to an estimated 297.4 million tonnes in 2007. Outside China, the

strongest demand has been in the ASEAN (the Association of South East

Asian Nations) group of countries. Between 2001 and 2007, billet demand

for the region rose from 12.5 million tonnes to around 18.8 million tonnes, a

CHINA IS THE

WORLD’S SINGLE

LARGEST PRODUCER AND

CONSUMER OF STEEL”“



growth rate of 7 per cent per annum. Demand for billet has also been

strong in South Korea, Japan and Taiwan.

Merchant billet trade in Asia has been dominated by China in recent

years. After years of importing billet, China’s rapid growth in steel

production saw the country become a major net-exporter of billet in 2004,

and many of the region’s rerollers have come to rely on it for their source

material. In 2007, for example, the main export destinations for Chinese

billet were Vietnam, Taiwan, Thailand, South Korea and Indonesia. However,

the Asian billet market is not entirely dependent on China for billet supply –

and rightly so, given the recent tightness in availability from China. Russia

and Brazil are also both important suppliers of billet to the region.

PricesRecent years have seen a fundamental change in steel pricing levels, as

well as unprecedented volatility. The CRU Handbook for Steel Billet sheds

some light on recent price trends. Export prices of CIS billet between 1995

and 2003 averaged around $181/tonne. Between 2004 and 2007, the

average price level for CIS billet exports increased to $392/tonne, while

prices in early 2008 soared above $650/tonne. In terms of volatility, the

standard deviation of CIS billet prices during any given calendar year



averaged $9/tonne prior to 2004. Since then it has averaged $35/tonne –

over four times higher.

The Far East region has also seen higher price levels and increased

volatility in recent years. For example, import prices for billet into East and

Southeast Asia averaged $222/tonne between 1994 and 2003, but have

averaged $424/tonne since then. Indeed, Asian billet prices between

January and December 2007 increased by $200/tonne. In terms of volatility,

the average standard deviation for Far East billet prices has increased from

$12/tonne before 2004 to $42/tonne in the period since then.

Looking ahead, rising prices and increased volatility look set to continue

in regional billet markets. In early 2008, both CIS export prices and Asian

prices increased by more than $100/tonne due to surging scrap costs.

With steel demand expected to remain strong, and tightness in the raw

materials markets buoying input costs, billet prices should remain at high

levels throughout the year. Against this backdrop, some form of risk

management tool would clearly be advantageous to the industry.

Gavin Montgomery is steel team consultant at CRU

Percentage price changes for billet in the Far East and CIS

Rising billet prices for the Far East and CIS



he steel industry has undergone a boom in recent years, driven by rapid

growth in Asia, especially China. Between 2000 and 2007, global crude

steel output grew by 495 million tonnes, equivalent to annual growth of 8

per cent over the period. Chinese growth accounted for 362 million tonnes

or 73 per cent of this growth. The advance in steel output has been

accompanied by a strong increase in demand for raw materials and has

resulted in correspondingly sharp price increases for many of the key

steelmaking raw materials.

One market that has seen notably sharp price rises over the past few

years is metallics. Ferrous scrap is used in both conventional BOF (basic

oxygen furnace) steel-making as well as in EAF (electric arc furnace) mini-

mills. Pig iron and hot briquetted iron (HBI) are also used in EAF

steelmaking, often as a substitute for prime grade scrap, especially where

local scrap supply is limited. Mini-mills are widely used for long product

steelmaking in Asia, the Middle East and southern Europe. As much of the

additional steel demand in these regions has been in the form of long

products for the construction industry, there have been significant

investments in EAF mills. Between 2000 and 2007, global EAF steel output

grew by 150 million tonnes, during which time global scrap demand also

grew by 150 million tonnes.

MediterraneanThe Mediterranean region is an important market for scrap, as steel

production in many of the countries bordering its shores focuses on long

products produced by mini-mills. Countries such as Spain and Italy are

significant scrap importers. Turkey is a major scrap consumer too, and is

currently the world’s largest importer, importing 14.5 million tonnes last

ONE MARKET THAT HAS

SEEN NOTABLY SHARP

PRICE RISES OVER THE PAST

FEW YEARS IS METALLICS”“

Scrap prices have soared overthe past three years and theyare expected to rise further in2008. By Calum Baker

Scrap heads higher

T

Recent price trends and the outlook for 2008Global demand for metallics has been driven by a resurgent steel market

and supply remains tight, so scrap is trading at levels well above those seen

prior to 2004. Last year, scrap prices rose strongly in all regions and CRU’s

metallics price index, CRUmpi, reached a record level of 240.7 in

December, a year-on-year rise of 23 per cent. Metallics prices in Asia saw

particularly sharp rises during 2007, with the #1HMS benchmark grade

reaching nearly $380/tonne (quoted on a c&f Pohang basis) by year end.

This price compares with $290/tonne at the beginning of the year.

Mediterranean prices also saw some gains, albeit modest, during 2007. For

example, Italian shredded scrap prices rose from €243/tonne in December

2006 to €260/tonne in April 2007, before retreating to €250/tonne by year

end, as EAF melt rates in Europe declined during the second half of the

year and scrap demand was consequently lower. Meanwhile, the export

price of scrap from the Black Sea, a key benchmark for supply to Turkey

and the eastern Mediterranean region, reached $320/tonne in December

(on a FOB basis), an increase of $67/tonne over the previous year.

The first weeks of 2008 saw further significant price increases.

Demand for long products remains robust, especially in Asia, and

finished steel prices are rising as a result, so demand for metallics has

been high. The impact has been particularly strong as this demand has

coincided with a period of restocking, and at a time of year when scrap

supply is squeezed due to holidays and poor weather. Asian scrap prices

have approached the $500/tonne (c&f ) level, following a flurry of

purchasing activity. Meanwhile, a combination of strong demand for

steel and seasonal limitations on the supply of scrap has seen scrap

prices in Europe head north too, up by as much as €50/tonne since the

year. Scrap is supplied to the Mediterranean from a number of locations,

including Continental Europe, the CIS and, increasingly, North America. In

recent years the volume of imports from the CIS has declined sharply

(from around 19 million tonnes in 2004 to 9.5 million in 2007). Russian

scrap exports alone fell 17 per cent year-on-year in 2007 and this trend is

expected to continue as domestic demand for scrap increases and the

underlying scrap pool shrinks. The CIS has also been a key supplier of

merchant pig iron and HBI to the Mediterranean region, although

shipments of these materials have been in notable decline too, due to

increased demand in the Russian and Ukrainian domestic markets.

AsiaThe Asian region is the largest producer of steel and the largest metallics

market in the world, accounting for approximately 46 per cent of global

demand. China has become the largest consumer of scrap and, more

recently, the world’s largest producer. As a result, Chinese imports of scrap

have actually declined over the past two years, although this is partly a

consequence of relatively low scrap rates at Chinese steel mills.

Japan remains a significant exporter of scrap to the Asian market (6.5

million tonnes in 2007), though increased domestic demand has seen exports

drop in recent months. To meet rising demand for scrap from countries

such as Taiwan, South Korea, Thailand and India, an increasing volume of

scrap consumed in Asia has been sourced from the USA, encouraged by the

weak dollar and a move towards lower-cost container freight for scrap

shipments. There has also been a wave of investments in DRI (direct

reduced iron) plants in the Middle East and mini blast furnaces (to produce

pig iron) in Southeast Asia to meet future demand for metallics in Asia.



Metallics prices have risen sharply since 2003, as demand has outstripped supply

steelmaking costs significantly in the coming year. Analysis using CRU’s

steel long products cost model suggests rebar production costs will rise by

between 12 per cent and 20 per cent in the next 12 months. With both raw

material and finished steel prices expected to remain high during 2008,

billet prices should also remain at high levels, but the risks associated with

short-term price volatility will be greater than ever.

Calum Baker, research manager, Steel Raw Materials, CRU

end of last year. Looking ahead, the outlook for 2008 is bullish. Although

prices are expected to fall back from current highs as supply picks up

over the spring and summer, they are nonetheless expected to remain

comfortably above the levels seen in 2007. Furthermore, as supply is

forecast to be especially tight in 2008, the possibility of strong price

swings and increased price volatility is greater than ever.

The result of price increases in the metallics market (and those which

have already been signalled or are expected to occur for other raw

materials such as iron ore, coking coal and metallurgical coke) will push up



Total metallics demand has risen by more than 200 million tonnes as crude steelproduction booms

Costs of steel production have risen significantly due to raw material price increases

AS SUPPLY IS FORECAST TO BE ESPECIALLY TIGHT IN 2008,

THE POSSIBILITY OF STRONG PRICE SWINGS AND INCREASED

PRICE VOLATILITY IS GREATER THAN EVER”“



INDIVIDUAL FACTORS

CAN QUICKLY

OUTWEIGH ONE ANOTHER,

ADDING TO VOLATILITY”“

Rebar is one of the most volatileproducts on the steel market,but prices are expected to befirm this year. By David Beattie

nderstanding the relationship between rebar,

billet and scrap has long been the preserve of steel

traders. With an intuitive sense for the arbitrage

opportunities that exist between the products on a

regional and global basis, mill managers and scrap

merchants have enabled a mercantile trade to develop.

But steel rebar pricing in the eastern Mediterranean region can, at

times, only be described as erratic and even over-reactive, as market

participants look to second-guess those up and downstream of

themselves, often resulting in substantial price volatility.

Raw material, energy and freight costs without doubt have an impact

on steel rebar prices, but in a somewhat unsophisticated product cycle,

individual factors can quickly outweigh one another, adding to volatility.

Turkey, with one shore on the Black Sea and another on the

Mediterranean, has built a large steel industry to convert the regional

supply of scrap metal into rebar that is sold throughout the Middle East,

Europe and North America. With nearly 9 million tonnes a year of rebar

exports, Turkey is often the dominant supplier to those markets and the

FOB price is a robust reflection of global demand for scrap, billet and rebar.

Of all steel products, rebar is perhaps the one which best

demonstrates price cyclicality – evidencing both the ‘boom and bust’

nature and the somewhat misaligned supply-and-demand complex that

can exist in the industry.

In January 2007, market sources indicated that rebar exports from

Turkey had started the month $100/mt up year-on-year at approximately

$500/mt. Booming construction activity in the Middle East and the Gulf

then pushed the spot market upwards and by the end of the month FOB

Turkey rebar exports were being transacted at approximately $550/mt.

The rebar rollercoaster U



In February, prices continued to gain, closing the month with an

average of $576.71/mt. The upwards price trend continued through March

when a sharp gain to $621.59 was reported. In April the spot price closed

the month at an average of $631.18/mt, a gain of 1.54 per cent on the

previous month.

By May, however, prices were beginning to become unstuck. The

average price of Turkish FOB rebar exports fell to $610.83/mt, a drop of

3.22 per cent from April. For the next two months prices continued to

slide. In June, the reported average was $597.50/mt, down 2.18 per cent,

while July closed at $572.27/mt, representing a month-on-month discount

of 4.22 per cent.

By August the market started to show some signs of recovery, with the

price gaining 2.11 per cent to $584.32/mt, but in September prices came off

again, closing an average of $583/mt, a 0.23 per cent fall. October saw the

BY AUGUST THE

MARKET STARTED

TO SHOW SOME SIGNS

OF RECOVERY”“



slide continue – this time dropping 4.11 per cent for a monthly average of

$559.02. November edged up to $563.86/mt.

December’s gain – to the surprise of many observers – broke through

the $600/mt mark once again, closing at an average price of $610.15/mt,

and was described by most as premature. However, growing concern over

price increases and a solid stance from Turkish producers was sufficient to

convince enough buyers to turn offers into sales.

The upward momentum has continued this year. A $50 surge in the

first week of 2008, quickly followed by another increase of $30, saw

prices break the $700/mt mark. By 7 January, rebar was being transacted

at $710/mt. By the end of the month $730/mt was the accepted market

price and in early February the spot price gained a further $10 to $740/mt.

According to ArcelorMittal chief executive Lakshmi Mittal, China and

the world’s developing nations will continue to have an impact on steel

prices in 2008 as demand for raw materials outweighs supply, pushing

prices upwards. In the US, meanwhile, price rises were announced in early

2008, on the back of low inventories and production control. In Europe too,

ArcelorMittal increased prices, reflecting strong demand across the EU.

Scrap is a major raw material for rebar production and analysts expect

continued tightness in this market from Russia and the CIS countries. As

domestic demand soars on the back of sustained infrastructure

development in these regions, scrap exports to Turkey may well seem

less attractive. This will put pressure on offers from other scrap-

exporting regions.

Supply constraints in scrap are almost certain, therefore, to affect

rebar prices throughout the year.

David Beattie, European markets editor for steel, Platts

FOB Turkey rebar exports – daily price assessments

FOB Turkey rebar exports – monthly averages

THE UPWARD MOMENTUM

HAS CONTINUED THIS YEAR”“


Regional and sectoral developments

urkey plays a key role as an international hub for the steel market, but

the dynamics of its contribution have changed significantly over the years.

Back in the early 1990s, the vast majority of its steel product exports went

to the Far East, not least because China was highly dependent on imports.

Now, the outflow of material from Turkey is centred on North Africa and

the Persian Gulf states.

As countries in the Middle East and North Africa (MENA) region pile up

petrodollars and ramp up their investment in infrastructure, demand for

steel is growing steadily, and Turkey is well placed to serve these markets.

Its proximity to MENA gives Turkish steel producers a distinct advantage in

terms of freight and this has greatly shifted the balance of its exports.

In 1993, for example, almost 75 per cent of Turkey’s total steel exports

went to the Far East. Five years later this had fallen to 15 per cent and by

2005, markets in that region accounted for just 5 per cent of the country’s

steel exports.

This trend has evolved during a time of significant expansion in Turkey’s

domestic production capacity. The Turkish Iron and Steel Producers

Association (TISPA) expected Turkey’s finished steel production to increase

by around 10 per cent in 2007 to 25.3 million tonnes. Figures for 2007 show

that overall iron and steel production rose 11 per cent, with growth in steel

output at 8.6 per cent. Further expansion is expected through 2009.

The huge appetite for steel in the Middle East has created a home for

this extra material, balancing the decline in demand from traditional export

destinations. Domestic demand is also growing stronger, however, and

additional capacity will be needed to satisfy it. In fact, the need to boost

production is becoming acute.

TURKEY IS EXPANDING

PRODUCTION IN MANY

SECTORS OF THE STEEL MARKET,

PUSHING UP ITS DEMAND FOR

BOTH IRON ORE AND SCRAP”“

TTurkey has always been a major part of the steel market,but its role is changing as local andinternational economic conditionsevolve. By Jim Banks

Turkey nears a turning point



“Turkey’s finished steel consumption is lower than its production. Even

though Turkey’s total steel production is higher than its consumption, in

terms of products, there is a huge deficit in some sectors,” comments Dr

Veysel Yayan, secretary general of TISPA.

TISPA has observed that Turkey’s consumption of finished steel

products has mushroomed over the last five years, up 86 per cent from

11.3 million tonnes to 20.8 million tonnes in 2006, and by a further 8 per

cent in 2007. Crude steel consumption per capita rose from 170kg in 2002

to 300kg in 2006 and increased to around 330kg in 2007.

The relative stability of the Turkish economy has been driving this

demand growth over recent years. The domestic construction industry

grew by 11 per cent in 2007, with 10 per cent growth expected for 2008.

Long-term forecasts suggest average annual growth of 9 per cent in the

construction sector from 2007 to 2011. This would increase long steel

consumption to around 11.6 million tonnes in 2007, a rise of 136 per cent

from the 4.9 million tonnes required in 2002.

“The stabilisation and strengthening of Turkey’s domestic economy has

positively affected the performance of the steel-consuming industries.

The construction industry has been growing due to the established

economic stability, especially since 2004,” says Dr Yayan.

Further economic growth is likely in the coming years, and Turkey’s

foreign minister, Ali Babacan, recently forecast that within 15 years Turkey

will be among the world’s 10 largest economies. The construction sector,

however, is starting to feel the impact of higher steel prices.

Production gains tighten the scrap squeezeTurkey’s domestic demand is still seen as relatively small compared to

other markets, but the ramp-up in production at its steel mills anticipates a

time when significantly more material will be needed to cater for demand

from local construction and manufacturing industries and the MENA region.

Currently, Turkey is expanding production in many sectors of the steel

market, pushing up its demand for both iron ore and scrap. The country is

already the world’s biggest importer of steel scrap, and the increasing use of

recycled raw materials in integrated facilities – as well as the capacity increases

– could put the squeeze on both scrap supplies and prices in the future.

“In 2006, although Turkey exported around 1.5 million tonnes of billet, it

also imported around 1.5 million tonnes of billet. In 2007, it is expected that

Turkey’s imports of billet will be around 1.4 million tonnes, with this

requirement sourced mainly from the Russia and Ukraine, but exports are

expected to rise to over 2 million tonnes,” notes Dr Yayan.

Scrap prices in Turkey have been soaring this year on strong demand for

rebar and flat bar. Mixed scrap prices have pushed towards $500 per

tonne. The upward price trend has seen Turkish mills accelerate their

buying of material.

Analysts agree that the scrap market is getting tighter and tighter,

predicting that the volume of scrap available from the CIS may fall

significantly – perhaps by as much as one-third, as more billet and rebar mills

open up in the region. Considering the relatively low cost of production of

steel in countries such as Russia and Ukraine, Turkish producers expect

these countries to have an important role in meeting demand from MENA.

Overall, Turkey’s imports of ferrous scrap for 2007 are expected to rise

by around 15 per cent to over 17 million tonnes, so the tightness in the

scrap market is a major concern for Turkish mills from a cost perspective.

Pressure from rising electricity prices adds to this concern.

The dynamics of the Turkish steel market will no doubt continue to

change, though expansion of domestic production will persist for some

while. In addition, Turkey remains a key hub for flows of material from

Russia and the CIS and an important supplier to the MENA region.

The inclusion of the Marmara Region as a delivery point for the LME’s new

regional steel billet contracts reflects the importance of Turkey in the nexus

of factors that define regional steel prices. The latest figures rank Turkey 11th

in the world and third in Europe in terms of steel production. Over the next

two years the country’s producers are aiming to climb up these rankings,

making Turkey’s role in the global market increasingly significant.

Jim Banks, columnist



WE THINK NOW WOULD

BE A GOOD TIME TO BUY

EUROPEAN STEEL SHARES”“

sk any steel expert to highlight the industry’s regional hot spots, and it is

fair to assume that, in the past, the Mediterranean did not feature highly on

the barometer.

As Marcel Genet, managing director of independent consultancy

Laplace Conseil, succinctly puts it: “For so long, the region was uninteresting.”

But that viewpoint has now changed. “There is a far more vigorous

growth story going on than has been previously recognised in the region,”

says Peter Hickson, analyst at investment bank UBS.

Demand for steel is booming in the Mediterranean and Black Sea basin,

particularly for long products. This is stoked predominantly by the

voracious appetite of the construction industry.

“Demand is linked to construction and vigorous economic growth,”

says Hickson. Laplace Conseil’s Genet agrees: “The needs of the region

are linked to its evolution.”

Egypt’s consumption of steel, for example, rose from 4 million tonnes in

2000 to 6.4 million last year and UBS predicts it will reach 7 million this year.

Similarly, Turkey’s steel consumption is forecast to more than double from

12.7 million tonnes in 2000 to 26 million this year, while Shane Rimmer,

director of EuroStrategy Consultants, looks even further out, predicting

Turkey will demand 31.4 million tonnes by 2012.

Laplace Conseil estimates that demand for steel is growing at around

3 per cent per annum in the region’s northern rim, where the more

developed economies of Spain, Italy and France prevail, but at a more rapid

rate of between 6 and 10 per cent in the southern rim, which includes

developing economies, such as Tunisia, Romania and the Balkans.

And there are few signs that this rising demand will abate any time soon,

thanks to persistent activity in the construction industry.

Johann Swahn, analyst at Morgan Stanley, says: “We expect European

steel prices to stabilise at the current high level and start rising in the

second quarter of this year. We think now would be a good time to buy

European steel shares.”

Analysts at Business Monitor International forecast an average annual

growth rate of 9 per cent for Turkey’s construction industry over the next

AEconomic growth is driving change in theMediterranean steelindustry. By Helen Dunne

The Mediterraneanwarms up

tonnes last year, while rival Sidenor opened a new bar-rolling mill in

March, expecting to reach its full capacity of 800,000tpy by the fourth

quarter of this year.

The region is also an active consumer of imported steel so it has, of

course, been impacted by rising world prices. Alan Coats, steel analyst at

HSBC, believes this is a relatively new phenomenon, perhaps linked to the

construction boom. “The Mediterranean tended to be a region where the

steel prices were lower than the rest of the world,” he explains. “It almost

operated as an isolated common market.”

Much importing is intra-region, with Morocco, for example, importing

billet from Spain and France; indeed, Italy and Spain, which together

produce almost 40 per cent of the region’s output, are a major source of

billet to their neighbours. A substantial inflow of billet to the region also

comes from the CIS region, particularly Ukraine.

However, many of the long products produced in the Mediterranean are

made from scrap, often imported from the UK. This is then melted in

electric arc furnaces, making the region dependent on electricity supply.

Indeed, in some countries, this has proved a major concern and power cuts

have disrupted production.

Scrap prices have also risen, in line with rebar and billet prices, although

they remain lower. Since January 2000, for example, scrap prices have risen

from less than €100/tonne to around €250/tonne in the Mediterranean.

Laplace Conseil’s Genet concludes: “The price of steel in the

Mediterranean region has been extremely volatile, and has risen sharply

since 2004. It is a problem in the marketplace as, until now, there was no

way to hedge this risk.”

Helen Dunne, columnist



three years, as a rising population demands more than 400,000 new

housing units a year, while the booming tourism sector requires luxury

hotels and improved transport infrastructure.

And in Greece, where the government is upgrading the country’s ports

and building a new rail development, the construction industry is

predicted to grow by around 3.4 per cent over each of the next three years.

Construction experts are even eyeing Libya, which is slowly emerging from

international isolation, and the potential development of its tourist and

commercial infrastructure.

To put the extensive building work in context, Laplace Conseil estimates

that each additional €1 billion spent in construction in the Mediterranean

leads directly to the consumption of an extra 82kt of steel. Similarly, every

extra €1 billion of industrial activity yields an additional 26kt of long

product steel.

There are 91 main producers of merchant and construction steel long

products in the Mediterranean and associated Black Sea region, ranging

from industry giant Mittal, with facilities in five countries, to Egypt’s Delta

Steel producing a mere 0.1 million tonnes per year. The combined annual

output is 71 million tonnes – or 5.3 per cent of the global steel market. Total

consumption of long products in the region is around 64 million tonnes,

and the surplus is exported, predominantly to the Middle East.

But, on a micro level, there are capacity constraints. Indeed, if UBS’s

prediction for Turkey’s steel consumption this year proves accurate,

for example, local production of about 11.4 million tonnes will fall

dramatically short. Consequently, many companies in the region are

actively looking to increase their capacity.

Greece’s Halyvourgiki, one of three producers in the country,

improved its processes and increased output by 20 per cent to 1.2 million

Total long products consumption per capita is growing both in north and south, example from western Mediterranean basin

Long products consumption per capita in the southwest Mediterranean region

Long products consumption per capita in the northwest Mediterranean region



Southeast Asiacalls for change

Tata Iron and Steel Works,Jamshedpur, West Bengal, India



ver the last 15 years, steelmakers from the

Association of Southeast Asian Nations (ASEAN)

have witnessed significant changes in trading

patterns. These have arisen primarily from new

challenges posed by China and its rapidly developing

steel industry.

Southeast Asia is an industry dwarf next to China, where companies are

estimated to have produced more than 400 million tonnes of steel in the

past year. India, by comparison, produced around 42 million tonnes, and

the whole of the ASEAN produced around 38 million tonnes.

Asia is expanding its share of global production fast, however, and it is

estimated that total steel production, including that of the Chinese, Japanese

and South Korean powerhouses, will increase to 880 million tonnes by the

end of 2010 from the current capacity of around 665 million tonnes.

Against this backdrop, volatility has increased substantially and many

in the region have found the environment difficult. There have been calls

for help, with industry participants saying an effective hedging system

would allow traders and millers to manage risk more effectively and take

more forward business. Many steelmakers believe, too, that an element

of predictability in future pricing would make it easier for them to

expand operations.

Thachat Viswanath Narendran, president and chief executive officer of

NatSteelAsia, is one such producer. He expects steel prices in Asia to remain

strong this year, as a result of tight supply and the high cost of raw materials.

NatSteelAsia plans to boost its long product rolling capacity by some

50 per cent in the coming years through downstream acquisitions in the

region, possibly in Indonesia and the Philippines. NatSteelAsia/Tata Steel

currently has around 2 million tonnes a year of steelmaking capacity and

3.5-4 million tonnes a year of rolling capacity in the region, including plants

in Singapore, Thailand, Vietnam and China.

Narendran believes that the strongest growth will come from Vietnam.

“Vietnam has had consistent high growth in steel demand for the last 10

years and in the next decade it is likely to overtake Thailand as the largest

consumer of steel in the ASEAN,” he says.

Narendran believes that China still has spare capacity and that

Southeast Asia will see more steel coming from the CIS, Turkey and Brazil

in the coming years.

“Japan also continues to be a big exporter of steel, though focused at

the high end. In developing countries, particularly those with raw materials,

there continues to be a strong pipeline of greenfield and brownfield

projects. The Middle East, which is a fairly large importer of steel today, is

also adding a lot of capacity,” he says.

China, however, remains the focus of most attention in the region.

Penetration by Chinese steelmakers has increased significantly since the

conclusion of the ASEAN-China Free Trade Agreement in 2005. While

supply from China has increased, the country’s soaring growth has also

been a driver of demand.

However, according to the ASEAN secretary general, Ong Keng Yong,

ASEAN steel manufacturers do have certain advantages over their

counterparts in China.

“Chinese products are very good and they compete quite well against

our steel products. Our own products would always be slightly pricier

because we don’t produce the kind of volumes seen in China,” he says.

But he explains, too, that there are other ways to compete, beyond price.

“We are close to our consumers for steel products. They prefer our own

ASEAN products,” he says.

One of Southeast Asia’s most significant problems is the continuing lack

of billet supply for its finished products. Thailand, for example, imports

more than 50 per cent of its billet needs. Demand for slab in the region is

estimated at around 10.1 million tonnes while production remains at about

half that level.

Ong believes it is vital to reduce existing cross-border transaction costs

as this would result in lower prices for steel products and allow ASEAN

products to compete more effectively.

There are also calls for liberalisation within the region. The Malaysian

government, for example, fixes ceiling prices for bar and billet and adjusts

them periodically in consultation with steelmakers and steel users.

Steelmakers have argued that the existing system keeps domestic prices

artificially low compared with international prices.

“Steel users have come to know that if domestic steel prices are kept

too low, there will be a supply shortage. I don’t think they want that to

happen,” says Malaysian Iron and Steel Industry Federation (MISIF)

spokesman Chow Chong Long.

According to MISIF, the Malaysian government is considering whether to

make changes to its price control system for steel bar and billet. Malaysian

steel producers have suggested that an automatic price mechanism should

be established tying the official prices of bar and billet to those of steel scrap.

Chow suggests that change will help Malaysia move towards eventual

price liberalisation for bar and billet, and believes this is in the air.

“To fully abolish the controlled price system is too drastic but there

could be a gradual move towards total price liberalisation,” he says.

As change begins to gather pace, futures contracts could provide the

region with an effective tool to manage volatility. They may also help to

dampen the cycles that have become such a feature of the industry in

Southeast Asia.

Bill Condie is a columnist at the Guardian

Southeast Asian steelmakers are keen toexpand production and maximise theirpotential in the global market. Bill Condieexplores the region’s development

O

MALAYSIAN STEEL

PRODUCERS HAVE

SUGGESTED THAT AN

AUTOMATIC PRICE MECHANISM

SHOULD BE ESTABLISHED”“

hina remains by far the world’s biggest producer and consumer of steel.

As such it exerts a powerful influence on regional prices of steel and its

raw materials. Prices across the region are expected to remain strong this

year, not least because of China’s continuously growing demand for steel.

The construction sector is booming and China’s steel industry has

become increasingly sophisticated in nature as infrastructure

development gathers pace. As well as enormous investment in roads,

railways, airports and industry, we are seeing in China the fastest growth in

housing construction ever witnessed.

Domestic demand is eating up much of the material that the burgeoning

domestic steel industry can produce, so China has become less active as an

exporter. This is already squeezing regional supply and billet exports look

set to fall further in the years ahead.

China’s steel industry is a major consumer of steel scrap, supply of which

is tightening all the time. Though the country produces large amounts of

scrap, domestic prices have been rising sharply this year and imports are

increasingly expensive.

In light of the rapid growth in domestic demand, the government is keen

to control steel exports, including billet. The authorities do not only want

to retain more of the billet that is produced from scrap, but they are also

keen to control the spread of energy-intensive production capacity.

ChineseevolutionChina is the most influential player on thesteel stage, and its influence will keepgrowing stronger. By Jim Banks



C



Luo Bingsheng, secretary general of the China Iron and Steel

Association (CISA), has made clear the intent to reduce steel exports this

year and China’s export tax on steel billet was raised from 15 per cent to

25 per cent in the first few months of this year.

The tax is meant to curb steel exports – and it has. After growing

substantially in the first half of 2007, China’s crude steel exports fell in the

second half of the year by more than 20 per cent and analysts attributed

this fall directly to cuts in export tax rebates.

In the last quarter of 2007, steel product and billet exports were 21 per

cent lower than the previous quarter at 13.6 million tonnes. In January,

China’s billet exports showed a dramatic drop year-on-year, totalling just

80,000 tonnes. In February, China exported no billet at all.

Looking ahead, CISA expects billet exports to trend downwards

throughout the year, estimating a fall of around 15 per cent from last year’s

record levels. Its projections suggest total billet exports of 1.5 million

tonnes in 2008, with combined steel billet and steel product net exports

falling by 20 million tonnes from last year’s total of 52 million tonnes.

Furthermore, though the effect of existing tariff hikes is being felt,

there is talk of further export tax rises, and Wu Xichun, key adviser to CISA

president Xie Qihua, recently stressed CISA’s desire to prevent a rebound

of exports.

Strong demand for China’s billet exports is likely to persist, but supply is

expected to remain tight. Observers note that efforts to cut exports are

not only intended to address a domestic shortfall of material or to reduce

China’s reliance on imports of crude steel and billet. The authorities are

also trying to control steel production as it consumes large quantities of

energy, which is a scarce commodity across China. There are concerns

about the environmental impact of steel production as well.

“China has a big impact on the steel markets globally,” says Thachat

Viswanath Narendran, president and chief executive officer of NatSteel

Asia, “but it still has capacity in excess of local consumption. Most of

the local demand in China is more than met by the capacity being built

or the capacity already in place. Today, what is being imported into

China is largely high-end steels – an area that may not have enough

Chinese producers.”

Chinese steel production may in fact have slowed down in late 2007, but

it still has strong prospects for future growth.

“On the demand side, given ongoing strength in fixed-asset investment

growth in China and other developing countries, steel production is

expected to grow strongly,” says Vivek Tulpule, chief economist for Rio

Tinto, who also noted: “There is an environment of strong demand growth

and constrained supply.”

Another consideration is China’s economic growth and construction

boom. Though growth is likely to remain stellar by comparison with

Europe and the US, China’s economy still faces challenges, and Wen

Jinbao, premier of China’s State Council, recently noted that there are

many domestic and international uncertainties that could make the year

ahead difficult.

The chief concern is to prevent the economy overheating and Jinbao made

clear the need for a “balance between economic development and inflation

control” – admitting that it would take considerable effort to achieve this.

For China’s steel producers, the outlook is not only one of expansion,

but also consolidation. The government’s goal is to merge smaller mills

into larger operations and ensure that by 2010 the top 10 producers

control half of total steel output. The process is progressing apace, and in

March two of the country’s largest steelmakers – Jinan Iron and Steel

Group and Laiwu Steel Group merged with Shandong Metallurgical Industry

Corp to form Shandong Iron and Steel Group.

Chinese producers have also become more active on the international

M&A stage. Chinalco, for instance, recently teamed up with Alcoa in the

$14 billion purchase of a 12 per cent stake in Rio Tinto, and there were

persistent rumours about further Chinese activity overseas.

“We believe consolidation will continue, as the industry, particularly in

Asia, is still quite fragmented,” notes NatSteel’s Narendran. “Chinese

companies have shown in the last year that they are also keen to

consolidate through M&A and we hope they continue to do so. The

Chinese steel industry is even more fragmented than the world steel

industry just now, and as China accounts for about 40 per cent of world

steel production and consumption, consolidation in China is important for

the global steel industry.”

Consolidation and export control will remain the dominant trends, and

China is likely to remain a dominant voice in the global steel market for

some time.

Jim Banks, columnist

THOUGH CHINA PRODUCES LARGE AMOUNTS OF SCRAP,

DOMESTIC PRICES HAVE BEEN RISING SHARPLY THIS YEAR

AND IMPORTS ARE INCREASINGLY EXPENSIVE”“



CIS in the fast lane



ussia and other parts of the Confederation of Independent States (CIS)

have been major exporters of steel for many years, but the region’s strong

economic growth and booming construction and infrastructure

development markets have prompted a surge in domestic production.

The Russian economy, for example, is growing at a rate of 8 per cent a

year as part of a programme of economic development intended to make

Russia the world’s most attractive business location by 2020. Only 10 years

ago, 70 per cent of steel production in Russia was exported and 30 per cent

was consumed at home. Today, the situation is exactly the reverse.

Alexei Mordashov, chief executive of Severstal, Russia’s largest steel-

maker if foreign assets are included, expects this trend to persist for some

time. Earlier this year, he forecast that domestic Russian demand for steel

will grow by 18 per cent a year for the foreseeable future.

Alan Coats, steel analyst at HSBC, is less confident. “Our growth rate

assumption is around 10 per cent,” he says. “Mordashov’s forecast seems

very high, though it is always possible.”

Severstal is certainly investing heavily to be able to cope with the

demand it foresees, mounting a $6 billion (£3.1 billion) investment

programme in its home operations, building new plants. The company

plans to increase its Russian steel output by 25 per cent to cope with orders

from Russian gas giant Gazprom and other energy companies, alongside

demand from Russia’s construction industry, which is growing by 20 per

cent a year.

Rival Mechel tells a similar story. “Mechel plans to invest about

$1.5 billion in its steel subsidiaries between 2007 and 2011,” says spokesman

Ilya Zhitomirsky. “The planned programme will increase total steel output

by 12 per cent.”

According to Zhitomirsky, the most significant investment at Mechel’s

main steel asset, Chelyabinsk Metallurgical Plant, will double production

of continuously-cast steel billets while also extending the mix of

construction products.

At MMK, another large Russian steel producer, there is an ambitious

$7 billion investment programme aimed at increasing production by

21 per cent by 2013, based on 2007 levels, as well as improving the product

mix towards more value-added products.

THE RUSSIAN ECONOMY

IS GROWING AT A RATE

OF 8 PER CENT A YEAR AS PART

OF A PROGRAMME OF

ECONOMIC DEVELOPMENT”“

RSteel production is soaring inRussia and demand isexpected to remain strong.But some observers worryabout the market overheating.Andrew Cave reports



In crude steel, the projected increase has already been provided for with

the installation of a 4.1 million tonne electric arc furnace in 2005. By 2013,

the capacity of processing facilities will catch up with crude steel output,

bringing finished product sales to 15 million tonnes a year.

HSBC’s Coats says there is a contrast in focus between Russia and

Ukraine, the two major steel-producing nations in the CIS. Russia accounts

for nearly two-thirds of steel production in the CIS, turning out 6.53 million

tonnes of the 10.8 million tonnes produced across the CIS in January 2008.

Ukraine produced 3.64 million tonnes and there is some production in

Moldova, Kazakhstan and Uzbekistan. But, while the focus in Russia is now

on domestic consumption, about two-thirds of Ukrainian steel production

is exported.

“The steel market in the CIS has historically been an export-led market.

The CIS is the biggest exporter of steel in the world after China, and Russia

and the Ukraine have been big exporters of steel for years,” says Coats.

“The Ukraine has always exported a lot of its production and this

situation has been boosted by the fact that Russia is now producing so

much for domestic consumption. Russia is now experiencing very strong

domestic demand, so there is less product available from Russia for export,

particularly long steel. We don’t expect this situation to change for some

time,” he adds.

At MMK, for example, about 54 per cent of its sales have been to

customers in Russia and the CIS since 2006. The company, whose main site

in Magnitogorsk is the largest single-site steel plant in Russia, is unusual in

Russia in that it is a steel company, rather than a vertically-integrated steel

and mining conglomerate.

About 25 per cent of its sales go into the Urals region where the plant is

located and the company says it is a priority for it to increase the

proportion of domestic sales, given that domestic steel offers a premium

over exports. By 2013, the company plans to sell up to two-thirds of

Magnitogorsk’s finished product output domestically.

“MMK has a clear focus on capturing growth from the expanding

Russian market as Russian steel prices offer a premium over export prices

of about $80,” said HSBC analyst Veronika Lyssogorskaya in a company

report on MMK in December. HSBC is expecting steel prices to increase by

13 per cent in 2008, helped by the strong demand from Russia. However,

the bank anticipates that steel prices will start falling in 2009.

Some executives fear that parts of the Russian steel industry are in

danger of overheating, with supply potentially outstripping demand, due

to the amount of new capacity coming onto the market. Others warn on

the downside of the negative economic effects of any weakening in the

commodity cycle.

Despite this caution, however, most analysts remain bullish on Russian steel.

“The supply and demand situation for Russia is fantastic,” says one

analyst. “The US and Europe are net importers of steel, and China is not

exporting as much as it used to, so there is not much supply and plenty of

demand in the export market. This is great for Russia. It still exports 30 per

cent of its steel production, so it is getting the benefit of price rises in the

export market while also experiencing very strong demand at home. We

think this can continue for at least the next three years.”

Andrew Cave is a columnist for The Telegraph

THE CIS IS THE BIGGEST EXPORTER OF

STEEL IN THE WORLD AFTER CHINA”“



Constructivefutures

STEEL IS THE

CONSTRUCTION

MATERIAL OF CHOICE FOR

OLYMPIC VENUES BECAUSE IT

MEETS THE ENVIRONMENTAL

BENCHMARKS”“



ritish athletes will be going for gold as they prepare for the 2012 London

Olympics, but construction companies will be just as competitive in their

pursuit of steel.

Demand for the industrial metal will be intense and companies involved

in the £9.35 billion project would benefit immensely if they were able to

ensure a supply of steel at a guaranteed price.

Steelmaker Corus estimates that the London Olympics will add about

250,000 tonnes to total UK steel demand, or around 1.9 per cent of the

UK’s 2006 annual consumption of 12.9 million tonnes.

The British Constructional Steelwork Association (BCSA) says the figure

could be as high as 400,000 tonnes or 3.1 per cent of annual UK consumption.

The figures may seem dramatic but they are in line with an analysis of

previous Olympics by construction economists Franklin + Andrews.

This showed the 2004 Athens Olympics used more than 250,000 tonnes

of steel, of which the Olympic stadium alone consumed in excess of 10,000

tonnes.

“Steel is the construction material of choice for Olympic venues

because it meets the environmental benchmarks as well as providing

innovative design and construction solutions,” says James Fiske, author of

the Franklin + Andrews report.

BThe construction industry hasbeen battling with volatile steelprices in recent times. Steelfutures should help companiesto cope. By Phil Thornton

A computer generated image of the London 2012 Olympic stadium



In the UK market, 80 per cent of all non-domestic framed construction

is steel, which makes this commodity a vitally important variable when it

comes to tendering for price.

A spokesman for the UK’s Construction Engineering Contractors

Association says: “Steel is one of the materials that have been subject to

considerable price pressure in the last couple of years. Demand from

elsewhere in the world, such as China, has pushed the price up, so anything

that delivers a mechanism to manage price risk would be good.”

Jeff Kabel, vice president of steel trading at Koch Metal Trading,

explains that demand for a futures contract has increased in the last

two years.

“Five years ago you did not think about hedging your steel prices for a

construction project because it was not that volatile,” he says.

Recently, however, prices have been highly volatile. Billet prices

gyrated by $50 a tonne last year, for instance, and showed an overall rise

of $150 a tonne.

“If firms could have used contracts as a way to mitigate that exposure,

they would have,” Kabel says.

Kabel says the “beauty” of the futures market is that it is financial, so

that while a builder involved in a project for the London Olympics is likely

to buy physical steel from a regional supplier, the futures market will

offer a global price.

“You are spreading out the potential exposure,” he says.

Construction firms tend to agree. A spokesman for the UK’s Construction

Confederation, an umbrella group of five bodies that includes the Major

Contractors Group, says: “If the market does manage risk by providing a

greater degree of certainty in a volatile market, that would be a benefit for

contractors as this has been an issue in recent years.”

Skanska, the international construction company, explains that volatility

in steel prices is a major issue because it can have a significant impact on its

balance sheet.

“Steel prices can go up and down like nobody’s business,” says director

Ian Luke. “Our market is itself unpredictable – we can determine a volume

of business, but what kind of business makes that up can vary considerably.

Because of that, the quantities of steel involved also vary.”

The LME’s steel contract is based on billets, a semi-finished steel

product with a good price correlation to rebar, which is used heavily in

construction, primarily in the manufacture of reinforcing rods.

Steel prices spiked sharply in the first months of 2007. According to

commodity data from the World Bank, the price of a metric tonne of steel

rebar jumped from an average of $450 in the final quarter of 2006 to

$540.8 over the second quarter of 2007. Such volatility provides a graphic

illustration of the challenges facing construction firms, as they attempt to

calculate future costs.

“You may need a tranche of rebar in June 2009. The price starts to spike

in April or May for no particular reason and it becomes clear that it would

have been worth looking at the financing in January,” says Koch’s Kabel.

In Britain, the steel industry is big business. It has a global turnover of

£2 billion and provides employment for tens of thousands of people,

according to the BCSA. The UK has also embarked on a major

infrastructure boom in the public sector, with projects such as the new

Channel Tunnel Rail Link, and in the private sector, including the Wembley

and Arsenal Emirates football stadiums.

ThyssenKrupp Bausysteme established a company in the UK last year to

cope with anticipated demand, saying that the Olympic Games in 2012

would give a “strong boost” to building activity in all areas of commercial

building over the next few years.

The main, 80,000-seater stadium is the largest contract to be awarded

to date and will require 12,000 tonnes of structural steel, according to the

Olympic Delivery Authority. Other contracts, many of which are at the

procurement stage, include arenas for hockey, handball, basketball,

velodrome and aquatics events.

It is intriguing to note, however, that even if steel futures are a new

concept, they are seeking to tackle a problem as old as the steel industry

itself. Almost exactly 90 years ago, on 19 December 1918, the New York

Times reported plans for a new form of steel contract that would have a

“corrective influence on certain past evils, such as sellers inclined to take

more orders than they could meet”.

A century on and today’s high and volatile steel prices combined with a

boom in construction projects, such as the 2012 Olympics, make the ability

to lock in steel prices as valuable a concept as it has ever been.

Phil Thornton is lead consultant at Clarity Economics

WHILE A BUILDER INVOLVED IN A PROJECT FOR THE LONDON

OLYMPICS IS LIKELY TO BUY PHYSICAL STEEL FROM A REGIONAL

SUPPLIER, THE FUTURES MARKET WILL OFFER A GLOBAL PRICE”“


LME news

News from the Exchange

LME launches own direct data product, LMEliveThe LME has launched its own real-time direct data product, LMElive,

which provides comprehensive market information on all LME contracts,

direct from source, for the first time in the Exchange’s 131-year history.

The product includes full market information and price depth for the LME’s

non-ferrous metals, steel and plastics contracts across all trading platforms.

LMElive has been developed in response to demand for greater

simplicity and portability in exchange data provision, and is available for as

little as $160 per month. It integrates intuitive, user-friendly functionality

and is fully configurable for any users’ individual needs. The product is

completely portable via an internet-delivered application and is also

available for BlackBerrys, PDAs and mobile phones.

Commenting on the launch, Martin Abbott, LME chief executive, said:

“LMElive is another addition to our expanding portfolio of service offerings

and is a natural extension to the LME’s highly effective data distribution

model. Our inherent knowledge and experience of Exchange market data

puts us in an ideal position to offer a competitive and cost-effective product

direct to the market.”

LMElive is available at:www.lmelive.com

Steel billettradingcommences on the LMETrading in two steel billet futures contracts,

Mediterranean and Far East, commenced on

the LME on Monday 25 February 2008. Trading

was made available initially on the Exchange’s

electronic platform, LME Select, and on the

inter-office telephone market. Open-outcry

trading via the LME Ring will commence on

28 April with the first prompt date on 28 July.

From the soft launch, the Exchange has been

publishing daily evaluated steel prices and open

interest volumes for both contracts. From

28 April, the full suite of LME market data

including official and unofficial prices, open

interest and warehouse stocks will be available.

Commenting on the launch, Liz Milan, LME

commercial director, said: “The purpose of the

soft launch is to generate a build-up of liquidity

in advance of the full launch in April. It also

enables those new to the concept of futures to

understand the different types of steel price

and contract data that will be published by

the Exchange.”

LME announces third consecutiveyear of record volumes The LME announced its annual volume figures for 2007, revealing a

third record year for the Exchange. Nearly 93 million lots were traded,

across futures and options, representing an increase of around 7 per

cent on 2006 figures.

Four contracts saw volume growth of more than 10 per cent on

2006 figures:

• The primary aluminium contract saw futures growth of over 10 per

cent, taking the total traded to over 40 million lots.

• The copper grade A contract grew 13.6 per cent to 21.4 million lots.

• The NASAAC contract grew over 19 per cent to 1.2 million lots.

• The aluminium alloy contract grew almost 11 per cent to around

0.5 million lots.

Commenting on the results, Martin Abbott, LME chief executive,

said: “These results clearly demonstrate another excellent year for the

LME, its high levels of liquidity and the continued confidence and

credibility of its services. Our current and expanding portfolio of

service offerings, led by the launch of the steel billet contracts in

February, means that we are on track to meet our target to double

volumes in the next five years.”

The LME announced the appointment of Liz Milan (pictured right) as

commercial director, commercial department, and Craig Hewett (pictured

below) as deputy director. They will head up a new department combining

all LME marketing and commercial activities. Liz will also join the LME

executive committee.

Liz has been with the Exchange since January 2005. Initially she was head

of physical operations and was then appointed steel project director in

October 2006. Prior to the LME, Liz worked in physical steel trading and

LME client liaison work for a number of companies, including Mitsubishi,

Stemcor and Sempra Metals.

Craig joined the LME in 2000 as head of

marketing and was appointed head of LME data in

July 2005, launching the Exchange’s own direct

data product, LMElive, in January 2008. He began

his career in sales, working in a number of

positions for Xerox products and services.

Commenting on the announcement, Martin

Abbott, LME chief executive, said: “Liz and Craig

bring many years of wide and diverse experience

to their new roles and I am confident that they

will make a valuable contribution to the

Exchange’s commercial strategy, approach and

operation. I look forward to working with Liz and

Craig in this new context as we go forward.”

Further appointments include Chris Evans,

who joined the Exchange in March 2008 as new

products manager and will assess the feasibility

of potential new contracts. He joined from Metal Bulletin, where he was

non-ferrous editor, and has previously worked at American Metal Market in

New York and Bloomberg in London.

In April 2008 Jessica Williams joined the LME. Jessica will take up the

newly-created role of member liaison executive and will assist in managing

the Exchange’s relations with members and membership-related enquiries.

Previous to her appointment, Jessica worked for eight years at Patsystems,

the trading software vendor, and also within the business development

team at LIFFE from 1994-1997.


LME news

LME launches onlinesteel hedging simulatorThe LME has

launched its own

online steel hedging

simulator. The

interactive hedging

tool is designed

to help anyone

interested in

managing steel price

risk to better

understand the process of hedging, the benefits and the financial

outcomes of different sector-specific example scenarios.

The simulator enables those from all aspects of the steel supply chain,

including producers, rerollers, the construction industry and steel

merchants, to select their own requirements and to track the progress of a

hedging programme through to its financial conclusion. It incorporates

interactive illustrations of different hedging strategies and an explanation

of key LME trading terms.

Commenting on the launch, Liz Milan, LME commercial director, said:

“The steel hedging simulator has been developed in direct response to

interest from the physical steel industry and from the LME’s member

firms. I would encourage any organisation looking to understand the

process of hedging, and the potential benefits, to try out the LME steel

hedging simulator.”

The LME steel hedging simulator can be accessed at:www.lme.com/simulator

Extension to prompt dates forprimary aluminium, copper, zinc,nickel and lead futures contracts The LME has announced it will extend the prompt dates for the

following futures contracts:

• High grade primary aluminium and copper grade A contracts from

63 months to 123 months (10 years);

• Standard lead from 15 months to 63 months (five years);

• Special high grade zinc and primary nickel from 27 months to

63 months (five years).

The extension to the prompt dates covers futures contracts only at

this stage. All cleared currencies are included.

The LME will establish and publish closing prices for the additional

months, but it will not establish or publish official and unofficial prices

for those months.

The exact date of the commencement of these changes will be

confirmed as soon as possible: the LME intention is for the contract

extensions to be operable by the end of 2008.

Commenting on this announcement, Martin Abbott, LME chief

executive, said: “There is already substantial OTC activity in these

contract prompt dates. Bringing this activity into the LME environment

will give market participants increased transparency, access to liquidity

and the benefit of risk management that clearing offers.”

The LME appoints key personnel

New members of the ExchangeThe LME is pleased to announce the following new members to

the Exchange: Mizuho Securities USA Inc, as a category 2 member,

ArcelorMittal Sourcing as a category 3 member, and Bank of London

and Middle East as a category 4 member.


Education

t is well-known that business professionals in the

metals industry are facing an even tougher

working environment, so finding time to learn is

an ongoing problem.

LME training courses offer organisations the

opportunity to learn about the Exchange’s

operation, structure, products, services and trading procedures.

To support this, the courses for 2008 have been revised and new

courses developed.

Underpinning the firm base established last year, the LME’s educational

programme for 2008 has been developed in three fundamental areas:

• The launch of new courses for 2008;

• Enhanced variety, depth and frequency of existing courses;

• Improved capability to deliver customised training programmes, tailored

to an organisation’s needs, either in the UK or internationally.

New courses introducedTo reflect customer demand, the LME will almost double the number of

courses it offers in 2008. The new courses are:

1. Risk Management for Metal Concentrates – this will promote

understanding of physical trading as well as managing price risk of

metal concentrates;

2. Understanding LME Data – this is designed to provide market users with

a comprehensive understanding of LME data;

3. LME Options Pricing and Trading Strategies – this is designed to provide

market users with a solid understanding of option pricing and the risk

management of option positions.

Onwards and upwardsCurrent portfolio enhancedTo keep pace with today’s rapidly changing business environment, the

Exchange is constantly evolving its existing portfolio of courses, with new

learning techniques, exercises, revised topics and workshops.

Future developmentsFinding time for training is a constant challenge. In response, the LME is in the

process of developing an online learning option to deliver training courses via

the web. This will increase the flexibility and accessibility of LME courses.

Tailored coursesSometimes, very specific business challenges require tailored training

solutions. Clients work in close collaboration with experts in the subject areas

in which they require training, to incorporate their organisations’ precise

requirements into a comprehensive educational solution.

Finally, to ensure that any training budget adds value and offers an excellent

return on investment, there are a range of discounts available, providing

considerable savings for volume, early and multiple bookings.

For more details, please visit: www.lme.com/education.asp;

tel: +44 (0)20 7264 5555; or email: [email protected]

I

Course Calendar 2008


AMALGAMATED METALTRADING LTD

55 BishopsgateLondon EC2N 3AH Tel: +44 (0) 20 7626 4521Fax: +44 (0) 20 7623 3982www.amt.co.uk

BARCLAYS CAPITAL

5 The North ColonnadeCanary Wharf London E14 4BBTel: +44 (0) 20 7623 2323www.barx.com/commodities/index.html

ED & F MAN COMMODITYADVISERS LTD

Cottons Centre, Hay’s LaneLondon SE1 2QE Tel: +44 (0) 20 7089 8574 Fax: +44 (0) 20 7089 8580www.edfmanweb.com

MF GLOBAL

Sugar QuayLower Thames StreetLondon EC3R 6DU Tel: +44 (0) 20 7144 5535Fax: +44 (0) 20 7144 6722 www.mfglobalmetals.com

MAREX FINANCIAL LTD

155 BishopsgateLondon EC2M 3TQTel: +44 (0) 20 7655 6000Fax: +44 (0) 20 7655 6024www.marexfinancial.com

METDIST TRADING LTD

80 Cannon StreetLondon EC4N 6EJTel: +44 (0) 20 7280 0000Fax: +44 (0) 20 7606 6650 www.metdist.co.uk

NATIXIS COMMODITYMARKETS LTD

Cannon Bridge House25 Dowgate HillLondon EC4R 2YATel: +44 (0) 20 3216 9000Fax: +44 (0) 20 3216 9201www.natixiscm.com

NEWEDGE GROUP (UK BRANCH)

10 Bishops Square London E1 6EG Tel: +44 (0) 20 7676 8000 Fax: +44 (0) 20 7676 8888 www.newedgegroup.com

SEMPRA METALS LTD

111 Old Broad StreetLondon EC2N 1SG Tel: +44 (0) 20 7847 7500www.semprametals.com

SOCIÉTÉ GÉNÉRALE

Exchange HousePrimrose StreetLondon EC2A 2DDTel: +44 (0) 20 7676 6000Fax: +44 (0) 20 7762 5453www.commodities.sgcib.com

SUCDEN (UK) LTD

5 London Bridge StreetLondon SE1 9SGTel: +44 (0) 20 7940 9431Fax: +44 (0)20 7940 9500 www.sucden.co.uk

CATEGORY 1

RING DEALINGMEMBERS

Member directory

Member directory


Member directory

CATEGORY 2

ASSOCIATEBROKER CLEARINGMEMBERS

ADM INVESTOR SERVICESINTERNATIONAL LTD

4th floor, Millennium BridgeHouse, 2 Lambeth HillLondon EC4V 3TT Tel: +44 (0) 20 7716 8610 Fax: +44 (0) 20 7294 0233www.admisi.com

BACHE COMMODITIESLTD

9 Devonshire SquareLondon EC2M 4HPTel: +44 (0) 20 7548 5481Fax: +44 (0) 20 7623 5113www.lme.com

BANC OF AMERICASECURITIES LTD

5 Canada SquareLondon E14 5AQTel: +44 (0) 20 7174 4000Fax: +44 (0) 20 7174 6400www.bankofamerica.com

BEAR STEARNSINTERNATIONAL LTD

1 Canada SquareCanary WharfLondon E14 5ADTel: +44 (0) 20 7516 6600Fax: +44 (0) 20 7516 6096www.bearstearns.com

BGC INTERNATIONAL

1 Churchill PlaceCanary WharfLondon E14 5RD Tel: +44 (0) 20 7895 7606Fax: +44 (0) 20 7894 8597www.bgcpartners.com

BNP PARIBAS

10 Harewood AvenueLondon NW1 6AA Tel: +44 (0) 20 7595 2000Fax: +44 (0) 20 7595 2555www.bnpparibas.co.uk

CITIGROUP GLOBALMARKETS LTD

Citigroup Centre33 Canada SquareCanary WharfLondon E14 5LBTel: +44 (0) 20 7986 3822Fax: +44 (0) 20 7986 3106www.citigroup.com

CREDIT SUISSESECURITIES (EUROPE) LTD

1 Cabot SquareLondon E14 4QJTel: +44 (0) 20 7888 8888Fax: +44 (0) 20 7888 1600www.credit-suisse.com

DEUTSCHE BANK AG

Winchester House1 Great Winchester StreetLondon EC2N 2DBTel: +44 (0) 20 7545 8000Fax: +44 (0) 20 7545 4455www.db.com

ENGELHARDINTERNATIONAL LTD

63 St Mary AxeLondon EC3A 8NHTel: +44 (0) 20 7456 7300Fax: +44 (0) 20 7456 7353www.engelhard.com

TRILAND METALS LTD

MidCity Place71 High HolbornLondon WC1V 6BATel: +44 (0) 20 7061 5500Fax: +44 (0) 20 7061 5620www.triland.com

FORTIS BANK SA/NV

5 Aldermanbury SquareLondon EC2V 7HRTel: +44 (0) 20 3296 8800Fax: +44 (0) 20 3296 8810www.fortis.com

GOLDMAN SACHSINTERNATIONAL

Rivercourt120 Fleet StreetLondon EC4A 2BBTel: +44 (0) 20 7774 2030Fax: +44 (0) 20 7740 2020www.gs.com

HSBC BANK PLC

8 Canada SquareLondon E14 5HQTel: +44 (0) 20 7992 8181Fax: +44 (0) 20 7992 4983www.hsbc.com

INVESTEC BANK (UK) LTD

2 Gresham StreetLondon EC2V 7QPTel: +44 (0) 20 7597 4356Fax: +44 (0) 20 7597 4504www.investec.com

JPMORGAN SECURITIES LTD

125 London WallLondon EC2Y 5AJTel: +44 (0) 20 7777 3910Fax: +44 (0) 20 7777 4744www.jpmorgan.com

KOCH METALS TRADINGLTD

Fountain House6th Floor130 Fenchurch StreetLondon EC3M 5DJTel: +44 (0) 20 7648 6300Fax: +44 (0) 20 7648 8505www.kochmetals.com

LEHMAN BROTHERSINTERNATIONAL(EUROPE)

25 Bank StreetLondon E14 5LETel: +44 (0) 20 7102 1000Fax: +44 (0) 20 7067 9197www.lehman.com

MACQUARIE BANK LTD(LONDON BRANCH)

A member of the Macquariegroup of companies.CityPoint1 Ropemaker StreetLondon EC2Y 9HDTel: +44 (0) 20 3037 4610Fax: +44 (0) 20 3037 4301www.macquarie.com.au


Member directory

MERRILL LYNCHINTERNATIONAL

Merrill Lynch Financial Centre2 King Edward StreetLondon EC1A 1HQTel: +44 (0) 20 7996 3900Fax: +44 (0) 20 7106 8020www.ml.com

MITSUI BUSSANCOMMODITIES LTD

4th Floor, St Martin's Court10 Paternoster Row London EC4M 7BBTel: +44 (0) 20 7489 6700Fax: +44 (0) 20 7489 6662www.mbclme.com

MORGAN STANLEY

25 Cabot SquareCanary WharfLondon E14 4QA Tel: +44 (0) 20 7425 8000Fax: +44 (0) 20 7425 8990www.morganstanley.com

PHIBRO FUTURES &METALS LTD

6 Duke StreetLondon SW1Y 6BNTel: +44 (0) 20 7484 2500Fax: +44 (0) 20 7839 1848www.phibro.com

ROYAL BANK OF CANADAEUROPE LTD

Thames Court One Queenhithe London EC4V 4DE Tel: +44 (0) 20 7029 7107Fax: +44 (0) 20 7029 7900www.rbccm.com

STANDARD BANK PLC

Cannon Bridge House25 Dowgate Hill London EC4R 2SBTel: +44 (0) 20 7815 3000 Fax: +44 (0) 20 7815 4236www.standardbank.com

TOYOTA TSUSHO METALS LTD

63 Queen Victoria StreetLondon EC4N 4UATel: +44 (0) 20 7429 7965Fax: +44 (0) 20 7429 7971www.ttmetals.com

UBS LTD

100 Liverpool StreetLondon EC2M 2RHTel: +44 (0) 20 7567 8000Fax: +44 (0) 20 7567 2874 www.ubs.com

CATEGORY 3

ASSOCIATE TRADECLEARINGMEMBERS

HUNTER DOUGLAS NV

Piekstraat 23071 EL, RotterdamNetherlandsTel: +31 (0) 10 439 7000Fax: +31 (0) 10 439 7099www.hunterdouglasgroup.com

HYDRO ALUMINIUM AS

Drammensveien 264N-0240 OsloNorwayTel: +47 (0) 22 539173Fax: +47 (0) 22 537930www.hydro.com

MACQUARIE BANK LTD

A member of the Macquariegroup of companies.1 Martin Place, SydneyNSW 2000 AustraliaTel: +61 (0) 2 8232 4770Fax: +61 (0) 2 8232 3590www.macquarie.com.au

CATEGORY 4

ASSOCIATEBROKER MEMBERS

AMBRIAN COMMODITIES LTD

Old Change House128 Queen Victoria StreetLondon EC4V 4BJTel: (0) 20 7634 4800Fax: (0) 20 7634 4801www.ambrian.com

CALYON SA

Broadwalk House5 Appold StreetLondon EC2A 2DATel: +44 (0) 20 7214 5500Fax: +44 (0) 20 7214 6600www.calyon.com

DRESDNER KLEINWORTLTD

PO Box 5271530 Gresham StreetLondon EC2P 2XYTel: +44 (0) 20 7623 8000www.drkw.com

FORTIS BANK GLOBALCLEARING NV

5 Aldermanbury SquareLondon EC2V 7HRTel: +44 (0) 20 3296 8800Fax: +44 (0) 20 3296 8256www.fortis.com

STANDARD CHARTEREDBANK

1 Basinghall Avenue LondonEC2V 5DDTel +44 (0)20 7885 3927Fax +44 (0)20 7885 8927www.standardchartered.com

CATEGORY 5

ASSOCIATE TRADEMEMBERS

A & M MINERALS ANDMETALS LTD

Apex Yard 29-23 Long LaneLondon SE1 4PL Tel: +44 (0) 20 7940 0430 Fax: +44 (0) 20 7403 3166www.amgroup.uk.com


Member directory

ANTOFAGASTAMINERALS SA

Ahumada 11, Piso 6SantiagoChileTel: +56 (0) 2 798 7000 Fax: +56 (0) 2 798 7096www.antofagasta.co.uk

ASHTON COMMODITIESLTD

Winchester House259-269 Old Marylebone RoadLondon NW1 5RATel: +44 (0) 20 7170 4200 Fax: +44 (0) 20 7170 4202www.ashtoncommodities.com

BHP BILLITONMARKETING AG

T Schip, Verheeskade 25PO Box 195112521 BE The HagueNetherlandsTel: +31 (0) 70 315 6666Fax: +31 (0) 70 315 6721www.bhpbilliton.com

BHP BILLITON OLYMPICDAM CORPORATIONPTY LTD

Stanhope House Highgate High Street London N6 5JL Tel: +44 (0) 20 8341 9646 Fax: +44 (0) 20 8340 0654www.wmc.com

BRITANNIA REFINEDMETALS LTD

Botany RoadNorthfleetGravesendKent DA11 9BGTel: +44 (0) 1474 538200Fax: +44 (0) 1474 538290www.brl.co.uk

CHILE COPPER LTD

27 Albemarle StreetLondon W1S 4HZTel: +44 (0) 20 7907 9600Fax: +44 (0) 20 7907 9610www.lme.com

DD&CO LTD

15 Grosvenor GardensLondon SW1W 0BDTel: +44 (0) 20 7663 5460Fax: +44 (0) 20 7663 5462www.dawnayday.com

EASTERN ALLOYS INC

PO Box 317MaybrookNY 12543-0316USATel: +1 (0) 845 427 2151Fax: +1 (0) 845 427 5185www.eazall.com

EUROMIN SA

Belgrave House 6th Floor 76 Buckingham Palace Road London SW1W 9TQTel: +44 (0) 20 7917 8960 Fax: +44 (0) 20 7917 8961www.lme.com

FREEPORT-MCMORANCOPPER & GOLD INC

One North Central Avenue Phoenix AZ 85004 USA Tel: +1 (0) 602 366 8100www.fcx.com

GFI GROUP INC

1 Snowden StreetLondon EC2A 2DQ Tel: +44 (0) 20 7422 1145 Fax: +44 (0) 20 7877 8065www.gfigroup.com

ALCAN HOLDINGSWITZERLAND AG

Max Högger-Strasse 6PO Box 1852CH-8048 ZurichSwitzerlandTel: +41 43 497 42 26 Fax: +41 43 497 42 01www.lme.com

GLENCORE UK LTD

50 Berkeley StreetLondon WIJ 8HDTel: +44 (0) 20 7629 3800Fax: +44 (0) 20 7499 5555www.glencore.ch

HALCOR SA

57th National Road Athens-Lamia, Inofita Viotias GR 32011 GreeceTel: +30 2262 0 48111Fax: +30 2262 0 48644www.halcor.gr

CVRD INCO LTD

200 Bay Street, Royal BankPlaza, Suite 1600, South TowerP.O. Box 70, Toronto, OntarioM5J 2K2 Canada Tel: +1 (0) 416 361 7511Fax: +1 (0) 416 361 7781www.inco.com

INDUMETAL RECYCLINGSA

Carretera de la Cantera, 1148950 Asua-Erandio Vizcaya, Spain Tel: +34 (0) 94 471 0165Fax: +34 (0) 94 471 0398www.indumetal.com

KME GERMANY AG & CO KG

Klosterstrasse 29D-49074 OsnabrückGermanyTel: +49 (0) 541 321 4900Fax: +49 (0) 541 321 4930www.kme.com/en

LONCONEX LTD

1 Warwick RowLondon SW1E 5ERTel: +44 (0) 20 7347 1500Fax: +44 (0) 20 7347 1501www.lme.co.uk

LN METALSINTERNATIONAL LTD

Floor 281 Gracechurch StreetLondon EC3V 0AUTel: +44 (0) 20 7536 0300Fax: +44 (0)20 7001 2198www.lnmetals.com

METDIST LTD

80 Cannon Street London EC4N 6EJTel: +44 (0) 20 7280 0000Fax: +44 (0) 20 7606 6650www.metdist.co.uk


Member directory

NEXANS DEUTSCHLANDINDUSTRIES GMBH & CO KG

Bonnenbroicher Str. 2-1441238 MönchengladbachGermanyTel: +49 (0) 2166 27 2212Fax: +49 (0) 2166 27 2673www.nexans.de

NORDDEUTSCHEAFFINERIE AG

Postfach 10 48 40, D-20033HamburgGermanyTel: +49 (0) 40 7883 2272Fax: +49 (0) 40 7883 2255www.na-ag.com

NYRSTAR BUDEL

Postbus 2001Hoofdstraat 16024 AA Budel-DorpleinNetherlandsTel: +31 (0) 495 512911Fax: +31 (0) 495 518285www.nyrstar.com

OUTOKUMPU OYJ

Riihitontuntie 7 BPO Box 140FI-02201 ESPOOFinlandTel: +358 (0) 9 4211Fax: +358 (0) 9 421 3888www.outokumpu.com

PRYSMIAN CABLES &SYSTEMS LTD

Chickenhall Lane EastleighHampshire SO50 6YUTel: +44 (0) 151 430 3909Fax: +44 (0) 151 430 3913www.uk.prysmian.com

PRIMARY INDUSTRIES(UK) LTD

1 Warwick RowLondon SW1E 5ERTel: +44 (0) 20 7347 1500Fax: +44 (0) 20 7347 1501

REMETAL SRL (BEFESAALUMINIO BILBAO)

Ctra. Luchana-Asua 13, 48950ErandioVizcaya, SpainTel: +34 (0) 94 453 02 00Fax: +34 (0) 94 453 00 97www.befesa.com

RICHMONDCOMMODITIES LTD

Runnymede MalthousePO Box 234, EghamSurrey TW20 9WWTel: +44 (0) 1784 741155Fax: +44 (0) 1784 741166

RIO TINTO PLC

5 Aldermanbury SquareLondon EC2V 7HRTel: +44 (0) 20 7781 2000 Fax: +44 (0) 20 7781 1800www.riotinto.com

ROBA METALS BV

Zomerdijk 273402 MJ IJsselsteinNetherlands Tel: +31 (0) 30 68 60 204 Fax: +31 (0) 30 68 87 56www.robametals.com

SIMPORTEX LTD

452a Finchley RoadLondon NW11 8DGTel: +44 (0) 20 8457 8770 Fax: +44 (0) 20 8457 7484www.simportex.com

MFC COMMODITIESGMBH

Millennium Tower, 21st FloorHandelskai 94-96A-1200 Vienna, AustriaTel: +43 (0) 1 240250Fax: +43 (0) 1 24025 260www.mfc-commodities.com

TANGENT TRADING LTD

1 Dollis MewsLondon N3 1HH Tel: +44 (0) 20 8349 4822 Fax: +44 (0) 20 8349 4860www.tangenttrading.co.uk

TECK COMINCO AG

Suite 600-200 Burrard StreetVancouverBC V6C 3L9CanadaTel: +1 604 687 1117Fax: +1 604 687 6100www.teckcominco.com

TRIMET ALUMINIUM AG

Heinrichstrasse 15540239 DusseldorfGermany Tel: +49 (0) 211 9 61 80 0 Fax: +49 (0) 211 9 61 80 60www.trimet.de

WILHELM GRILLOHANDELSGESELLSCHAFTMBH

Am Grillopark 547169 DuisburgGermanyTel: +49 (0) 2034 0660Fax: +49 (0) 203 4066 114www.grillohandel.de

W J FURSE & CO LTD

Wilford RoadNottingham NG2 1EBTel: +44 (0) 115 964 3700Fax: +44 (0) 115 986 0538www.furse.com

WOGEN RESOURCES LTD

4 The SanctuaryWestminsterLondon SW1P 3JSTel: +44 (0) 20 7222 2171Fax: +44 (0) 20 7222 5862www.wogen.com

ZINIFEX BUDEL ZINK

Postbus 2001Hoofdstraat 16024 AA Budel-DorpleinNetherlandsTel: +31 (0) 495 512911Fax: +31 (0) 495 518285www.budelzink.nl


Contacts

Useful informationLME contactsCommercial director: Liz MilanTel: +44 (0) 20 7264 5555; email: [email protected]

Steel business manager: Lotta UlfsdotterTel: +44 (0) 20 7264 5555; email: [email protected]

Analytics business manager: Martin EvansTel: +44 (0) 20 7264 5555; email: [email protected]

Brand listings enquiries: Hilary PeppermanTel: +44 (0) 20 7264 5555; email: [email protected]

Warehouse listing enquiries: Robert HallTel: +44 (0) 20 7264 5555; email: [email protected]

Media enquiries: Thom LantTel: +44 (0) 20 7264 5555; email: [email protected]

Training enquiries: Simone CarminatiTel: +44 (0) 20 7264 5555; email: [email protected]

LMElive enquiries: Caroline PorterTel: +44 (0) 20 7264 5555; email: [email protected]

Market data enquiries: Andrej HuesenerTel: +44 (0) 20 7264 5555; email: [email protected]

LME executive committeeMartin Abbott: chief executive Philip Needham: director of finance and company secretaryDiarmuid O’Hegarty: executive director, regulation and complianceLiz Milan: commercial directorAlex Morley: general counsel and head of enforcementMichael Warren: chief technology officer

LME Holdings Ltd, board membersD Brydon CBE (LME chairman) M Abbott (LME chief executive)G CuadraP CullifordJ CouplandThe Rt Hon The Lord Fraser of Carmyllie QCM FrawleyG HoffmannM HutchinsonM McTigheM OverlanderF Somerville-Cotton

LME Ltd, board membersD Brydon CBE (LME chairman)M Abbott (LME chief executive)J CroftsJ CouplandP CullifordM FrawleyG HoffmannM HutchinsonM OverlanderC StonehillF Somerville-Cotton

For full details of LME board members, visit www.lme.com

The London Metal Exchange Ltd56 Leadenhall StreetLondonEC3A 2DXTel: +44 (0) 20 7264 5555Fax: +44 (0) 20 7680 0505Email: [email protected]: www.lme.com

Trading timesInter-office telephone trading – available 24 hours a dayLME Select – available from 01.00-19.00 (London time)Ring trading – available from 11.40-17.00 (London time)

Times as follows:

First sessionSteel FF and FM 11.40 to 11.45Aluminium alloy & NASAAC 11.45 to 11.50Tin 11.50 to 11.55Primary aluminium 11.55 to 12.00Copper 12.00 to 12.05Lead 12.05 to 12.10Zinc 12.10 to 12.15Nickel 12.15 to 12.20LL, LA, LE, LN 12.20 to 12.22Interval 12.22 to 12.23PP, PA, PE, PN 12.23 to 12.25Interval 12.25 to 12.30Copper 12.30 to 12.35Aluminium alloy & NASAAC 12.35 to 12.40Tin 12.40 to 12.45Lead 12.45 to 12.50Zinc 12.50 to 12.55Primary aluminium 12.55 to 13.00Nickel 13.00 to 13.05Steel FF and FM 13.05 to 13.10Interval 13.10 to 13.20Kerb trading 13.20 to 14.45Interval 14.45 to 14.55

Second sessionAluminium alloy & NASAAC 14.55 to 15.00Lead 15.00 to 15.05Zinc 15.05 to 15.10Copper 15.10 to 15.15Primary aluminium 15.15 to 15.20Tin 15.20 to 15.25Nickel 15.25 to 15.30Steel FF and FM 15.30 to 15.35LL, LA, LE, LN 15.35 to 15.37Interval 15.37 to 15.38PP, PA, PE, PN 15.38 to 15.40Lead 15.40 to 15.45Zinc 15.45 to 15.50Copper 15.50 to 15.55Primary aluminium 15.55 to 16.00Tin 16.00 to 16.05Nickel 16.05 to 16.10Aluminium alloy & NASAAC 16.10 to 16.15Kerb trading 16.15 to 17.00*

*Note:at 16.35 tin, PP and LL cease trading;at 16.40 lead and steel cease trading;at 16.45 nickel ceases trading;at 16.50 zinc ceases trading;at 16.55 copper ceases trading;at 17.00 primary aluminium, aluminium alloy and NASAAC cease trading


FAQs

What has the LME launched?The LME has launched two regional, physically delivered steel billet futures

contracts. The announcement of the two regional steel contracts is the

first part of a long-term plan to bring the benefits of price risk

management to the steel industry.

How do futures contracts help the steel industry?Steel futures contracts enable the steel industry to hedge against volatility

in steel prices:

• Hedging is the process of managing the risk of a price change by

offsetting it in the futures market.

The ability to hedge gives producers, consumers and merchants in the

industry the choice of how much price risk they are prepared to accept.

What are the regions to which the contracts relate and where arethe proposed delivery points?The two regions are the Mediterranean and the Far East. The proposed

delivery points for the Mediterranean are Dubai, United Arab Emirates, and

Marmara Region in Turkey; for the Far East, Incheon, South Korea, and

Johor, Malaysia.

Market intelligence shows that the largest exporting countries of billet

are the Ukraine, Russia, China and France and the LME delivery points

reflect this trade flow. Among the largest importers are Vietnam, Turkey and

South Korea. The LME is also taking into account freely-traded tonnages.

Why two regional contracts?The two contracts reflect different regional market fundamentals, which

imply different regional pricing, and, therefore, two regional contracts are

required.

What is the size of the market?The entire billet market is more than 500 million tonnes annually. The

contract specification the LME is launching focuses on that part of the

billet market used for rebar production, which is around 160 million

tonnes annually, and a large proportion of this is already physically traded

internationally with an active merchant class; merchants are trading

around 30 million tonnes annually.

Why billet?Unlike slab, billet is much more freely traded. In addition, it is easily and

relatively cheaply stored, unlike other steel end-products. It is not as prone

to being damaged and can therefore remain in storage for an indefinite

period of time.

Billet is a growing market and has experienced production growth of

around 40 per cent since 2000, with analysts suggesting a further 32 per

cent growth by 2010.

Most of the trade in billets is intra-country, and LME contracts are

designed to capture that regional trade. Market intelligence suggests that

merchant-traded billet amounts to around 30 million tonnes per year

which, in terms of size, is comparable to some of the LME’s non-ferrous

metals contracts. There is also a good degree of price correlation between

billet and rebar.

When will trading start?Trading on the Ring will commence on 28 April 2008. The first delivery date

will be 28 July 2008. However, to enhance liquidity and provide a clearing

mechanism, trading on Select and the inter-office telephone markets has

been made available since 25 February 2008.

How will the contracts be traded?Initially, trading will be out to 15 months. As with all other LME contracts,

only members of the Exchange will be able to trade; the physical industry

and other market participants must access the market and its risk

management services through the LME’s membership.

Why the LME?The LME has been trusted to provide risk management services to the

international base metals industry for 131 years and it has an outstanding

record of credibility in its contract specifications, price discovery and

physical delivery mechanism.

In addition, its unique experience of managing the delivery mechanism

of an international network of warehouses puts it in a strong position to

provide physically delivered contracts for steel.

Why is physical delivery important?The option of physical delivery, while very rarely used, plays an

important role in creating LME price convergence. In effect this means

that if the LME price appears too high or too low, those in the market

will see favourable pricing opportunity and make use of the delivery

mechanism. This presence, or threat, of delivery has the result of

constantly ensuring that the LME price is in line with the physical

market price.

It also enables industry to sell material via the Exchange delivery

system in times of over-supply, and use the LME as a source of material

in times of extreme shortage.

Do futures contracts create price volatility?There is no evidence to suggest that futures contracts have any effect

on price volatility. In fact this is not their purpose. What they do is

provide effective and reliable tools with which to manage volatility.

The reasons that the steel industry is subjected to volatility are similar

to those in other industrial metals markets.

However, they may be more pronounced in the steel industry due to

the fact that many producers are unable to establish fixed prices for

their purchase of raw material well ahead of time. This situation is

contrary to many companies in the non-ferrous industry, which often

have access to their own ore in the ground. The steel producer’s

problem is combined with the difficulty for the majority of steel

consumers to switch to other substitutes, as well as the lack of risk

management tools to reduce price risk. Thus, volatility remains high in

buoyant times.

The introduction of a futures market introduces the potential of

funds and speculators to invest in the industry; their involvement does

not increase fundamental volatility and may dampen cycles by taking the

opposite side to industrial clients.

LME steel FAQs


Glossary

Ask (offer) The quoted market selling price. An indication of the

willingness to sell a specific quantity of a commodity at a stated price,

opposite of a bid.

Backwardation A market situation when a nearby price is higher than a

further forward price.

Bid The quoted market buying price. An indication of willingness to buy a

specified quantity of a commodity at a stated price, opposite of ask.

Broker In the context of the LME, a person or company that buys from or

sells to customers.

CFTC Commodity Futures Trading Commission. Regulates US

commodities and futures markets.

Client contract A contract between an LME member (broker) and

its customer.

Commodity An item of trade or commerce, including services or rights, in

which standardised contracts for future delivery may be traded or exchanged.

Consumer hedge The purchase of futures and/or options on futures as

protection against a rise in raw material prices.

Contango A market situation when a nearby price is lower than a further

forward price.

FSA Financial Services Authority. Regulates the UK financial markets and

LME members.

Futures contract A standardised contract to buy or sell a specified

quantity or grade of commodity for delivery on a fixed future date at a

price agreed today.

Hedge A financial transaction designed to reduce the risk on an existing

physical or financial position.

Initial margin Funds/collateral put up as security for the guarantee of

contract fulfilment at the start of the contractual agreement.

Kerb A trading session in which open-outcry trading is conducted outside

of scheduled ring times, and where any or all of the LME contracts can be

traded simultaneously.

LCH.Clearnet LCH.Clearnet is the independent central counterparty that

acts as the clearing house for LME contracts and protects LME clearing

members against risk of default. LCH.Clearnet sets the LME margining rates.

Liquid market A market where buying and selling is easily achieved and

readily available, due to a large number of buyers and sellers operating

within the market.

LME member As a principal-to-principal market, only LME members are

allowed to trade on the LME. Authorised members have varying rights of

trading and clearing, defined by their category of membership.

Lot A specified quantity of a single contractual unit.

Margin The amount of money/collateral required by LCH.Clearnet from

LME clearing members for the purpose of insuring against default on an

open position.

Offset hedge A trade designed to offset the price risk that exists in a

physical transaction.

Open outcry A method of trading taking place in the LME Ring where

brokers make verbal bids and offers for LME contracts, stating the number

of lots of material, the price and delivery date required.

Principal-to-principal A contract where each party is acting as principal in

its own account. LME client contracts are between brokers and customers,

where each is responsible for its own obligations. LME Exchange contracts are

between clearing members of the Exchange. Once novated, LCH.Clearnet has

a principal-to-principal contract with each clearing member.

Producer hedge The purchase of futures as protection against a fall in

raw material prices.

Prompt date The delivery date of a futures contract. On the LME the

prompt date for a cash trade is two business days forward, so the last date

an open position can be closed is two business days before prompt.

RIE Recognised investment exchange, for example the London Metal

Exchange. Recognised under the terms of the UK Financial Services and

Markets Act 2000.

Ring The circle of seats on the LME floor used by traders during open-

outcry trading sessions. More commonly, the term is used to describe the

periods of trading, which are broken down into five-minute sessions for

each metal and two minutes for each of the two plastics.

Spot The first deliverable prompt date and the price quoted for it. On the

LME the term ‘cash’ is more commonly used.

Spread The difference between two prices. This is usually the difference

between a current price and a future price.

Variation margin A request to make an additional margin payment

because of an adverse price movement on a position.

Volatility The measure of the price change for a particular commodity

over a period of time.

Warrant A bearer document of title, issued by the warehouse company

using the LME’s SWORD system, for each lot of LME-approved material

held within an LME-approved warehouse. Warrants are used as the means

of delivering under LME contracts.

Glossary

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