Steel futures gain traction as Argus-linked LME steel contract marks birthday

Singapore, 11 March 2020

The London Metal Exchange (LME) launched its fob China hot-rolled coil (HRC) contract a year ago. The contract traded 67,109 lots in its first year — the majority of this since November — with record open interest reported at the end of February.

Volumes grow through a volatile 12 months

The LME’s HRC contract is settled against commodity market information provider Argus’ daily fob China (Tianjin) price for finished steel. It is the fastest growing steel contract ever launched by an international exchange.

The steel industry is the world’s second-largest commodity complex and, almost uniquely, has faced price volatility and major structural change largely without access to efficient hedging tools.

Since 2000, the steel industry has more than doubled production, with global output rising to 1.86bn t in 2019. Production has swung decisively from west to east, with China the leading producer by far, accounting for around half of global output. And pricing has changed, from annual fixed price contracts to shorter-term spot deals.

Over this period, liquid futures markets developed to manage newly volatile raw material prices, particularly for iron ore. But the same did not occur for finished steel markets, despite repeated requests from high-profile automotive manufacturers and others for tools to manage increasingly volatile steel prices. Over the past 12 months, China’s export prices for HRC have moved in a $110/t range — more than a quarter of outright value.

The LME’s launch of its HRC steel contract means there are now liquid futures markets for raw materials and finished steel, allowing steelmakers to hedge their profit margin. The LME fob China HRC contract is the most successful launch of a hedging tool for finished steel in terms of the liquidity that it has achieved.

The fob China HRC export price is a pan-Asian benchmark. It has high, hedgeable correlations with HRC imports in Vietnam, as well as HRC exports from Japan, South Korea, India and Taiwan, as well as further afield in the Middle East and north Africa.

“The Argus brand is growing quickly in ferrous markets,” Argus Media chairman and chief executive Adrian Binks said. “Companies are recognising the quality of our price reporting methodologies and market reporting by referencing Argus coking coal, iron ore, steel and scrap prices in both short and long-term contracts.”

“We are delighted to see the futures contract doing well, but the Argus index is not just for futures use. It provides a central reference for counterparties to transact with in volatile markets,” Argus senior vice-president of metals, Asia, Tim Hard said. “For decades, steel sales have been conducted solely on a fixed-price basis. The option of using ‘floating’, as well as ‘fixed’ spot price trades doubles companies’ pricing options. A concurrent futures market increases pricing options further.”

“The fob China contract’s year one liquidity growth has been the fastest among our ferrous futures launches to date, which speaks to the size of the market it addresses,” Head of LME Singapore Will Fyfe said. “Asia produces 70pc of the world’s hot-rolled steel products.”

Argus publishes finished steel price assessments in Argus Ferrous Markets and Argus Ferrous Bulletin. These reports provide price assessments, news and market commentary on the international spot markets for steel and steel feedstocks.

Argus calculates its price assessments using a volume-weighted average of concluded spot transactions and a survey of market participants. The China HRC export price references HRC steel on a fob Tianjin basis.