CARLSBAD, Calif. -- Despite interest generated among European steel producers and early indications that the London Metal Exchange could handle a steel futures contract, reaction among mini-mill producers to the idea was cooler than coastal California waters in January.

During a presentation by steel industry analyst John Lichtenstein entitled "LME Steel Futures Market, Good Idea or Not?" at the closing session of the Steel Manufacturers Association's annual meeting here Friday, the answer to the question appeared to be a resounding "not" among the executives present.

Steel executives said during and after the presentation they were convinced that steel futures presented specific difficulties not found with other exchange-traded metals, including aluminum.

Asked at the outset to indicate with a show of hands how many executives believed steel futures would have a significant impact on the market in the next two or three years, only Phillip E. Casey, SMA chairman and president and chief executive officer of Gerdau AmeriSteel Corp., and Tom Danjczek, SMA president, raised their hands. Six executives indicated that they believed futures would have only a modest impact.

Although steel conforms to the three requirements necessary for futures trading--a physical presence, people willing to hedge risk and people willing to speculate--the market poses significant hurdles, most notably defining a steel product, grade and specificity that could be used as a reference price.

Executives also said that unless steel futures were tied with resource futures like scrap, the idea would not fly.

Promoted in some circles as a means to soften the impact of price volatility by increasing price transparency, it is not clear that will be the case. Lichtenstein, who emphasized he was not an expert in steel futures and harbored doubts about some of the more optimistic claims of parties promoting steel futures, said that reducing pricing volatility was not necessarily the most interesting thing about steel futures. Instead, he indicated that their potential value to producers lay in whether participants would have the tools to reduce the impact of price volatility on the market.

Asked by Casey if steel futures would diminish the current impact that importers and brokers now have in dictating steel prices for developing countries unaware of global prices, Lichtenstein said it depended on what camp one listened to: Futures proponents said it would reduce importers' pricing impact, while others said volatility was simply the result of demand and production costs.

He cautioned that the complexity of the issue was hampered by theoretical and practical considerations and wildly differing opinions, like those indicated by the SMA members, all down the line.

Nancy E. Kelly

COPYRIGHT Reed Business Information

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