Reuters: Regulatory News: Clients tell London exchange to review steel futures

Reuters: Regulatory News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Clients tell London exchange to review steel futures Jun 12th 2012, 17:10 Tue Jun 12, 2012 1:10pm EDT * Traders want bigger daily billet deliveries from warehouses * Delisting of some warehouses and cash-settlement proposed * Queues at Detroit distort prices, traders say By Silvia Antonioli LONDON, June 12 (Reuters) - Traders and consumers want the London Metal Exchange to overhaul the way its steel billet contract works, including possible de-recognition of inefficient storage facilities or even creation of a new product, to avoid losing the business to other bourses. Disgruntled users of the futures contract, frustrated by slow delivery of metal from LME listed warehouses and the disconnect between billet physical and futures prices, drew up a list of suggested changes for the exchange's board to consider at a steel committee meeting late last week. "Some people are getting very upset because of the queues and are losing their patience," one source at a metals trading house said. "The relationship with the physical price is broken so the exchange has to intervene. They have to take quick decisions to save this contract," he added. The London exchange, the world's biggest marketplace for trading base metals such as copper and aluminium, launched futures for steel billet four years ago but they have been slow to gather volume and become a genuinely useful tool for hedging. One problem is shared with other metals. Firms operating warehouses in the global network recognised by the exchange take their time in releasing metal stored there, pleading logistical difficulties. Critics say it is more often a tactic to keep charging rent for as long as possible. They said warehousing companies should be made to ensure that exchange customers needing to take delivery of steel billets - semi finished steel long products mainly used in making construction materials - should be able to get hold of them in a shorter time. This would ease queues at busy locations, as currently steel needed by users gets stuck behind other metals waiting for delivery, often for months at a time. One way of forcing efficiency would be to take away approval for storage from congested warehouses such as Detroit in the United States, sources with knowledge of the matter said. Another measure suggested was scrapping the billet contract in favour of a new one with cash settlement - eliminating the delivery problems associated with a physically-backed, futures-based product. Physical Black Sea billet was at $570-575 per tonne this week while the three-month LME billet futures was at $360-$400, a gap that is making it extremely hard for traders to use the contract. The futures fetch the much lower price than physical steel partly because of the difficulty in taking delivery. "The LME steel billet contract has now divorced itself completely from the Black Sea billet price and unless action is taken by the LME to ensure that steel billets are moved to the front of the Detroit queue, liquidity will continue to decline and the contract is destined to fail," said the head of a European steel trading house. "If unrealistic physical premiums and delivery times are allowed to continue, I fear the LME is in danger of losing its reputation as a credible mechanism for pricing physical contracts and delivery." The LME confirmed it was considering some suggestions made at Friday's meeting but declined to give any information on what was discussed. WAIT FOR THE SALE? LME steel billet users say the LME needs to move fast to avoid seeing migration of all of its steel business towards cash-settled contracts offered by other exchanges, chiefly CME Group, or brokers. A spokesman for the LME said that it will probably take some time before any change to the contract is implemented. The fact that the LME is in the middle of a negotiation on its potential sale could make changes even slower. "Often, even with the best will in the world, there is some lag between a suggestion being made and it being researched and taken," said Chris Evans, head of business development at the LME. "The board has other things to consider as well, so we are not in a position to present anything to the board at the next meeting regarding what was discussed on Friday." The LME steel contract first came under pressure last summer, when a noticeable rise in cancelled warrants, or material earmarked for delivery, caused concern among some players about the health of the contract itself. Talk swirled that a major market player had become frustrated and wanted to remove their material from the market. The contract was criticised again last October when the LME decided to suspend the validity of 274 steel billet warrants held by MF Global on behalf of Stemcor, because MF Global's administrator, which had taken control of assets belonging to the bankrupt broker, was unable to adhere to LME lending guidance. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions