LME chooses Argus index as settlement for China HRC

London-based metals exchange the LME has chosen Argus as the basis for its cash-settled fob China hot-rolled coil (HRC) futures contract, due to launch on 11 March.

China is the world's largest producer, consumer and exporter of steel. It has the most volatile, transparent and liquid traded spot finished steel market and exerts a strong influence over global pricing. There is a 90pc-plus correlation between fob China HRC and share prices of the world's largest steelmakers, as well as with other key benchmarks in the ferrous supply chain.

In 2017, China accounted for 831.72mn t of global steel production of 1.69bn t. Around 30pc comprised HRC. Despite the contraction in exports since 2015, when China shipped a record 112mn t of steel abroad, the country remains by far the world's largest exporter.

HRC is a flat-rolled steel used in a variety of end-use applications, such as white goods, yellow goods and carmaking. It can also be further reduced by cold-rolling and transformed into hot-dip galvanized coil, primarily used in automotive manufacturing and construction.

World Steel Association statistics show HRC and sheet to be the largest single-item steel product exported by volume, globally. Latest data, for 2017, shows global HRC exports in their fifth straight year of expansion, hitting 84.8mn t.

Finished steel contracts are a natural progression for the derivatives industry, with interest coming from a wide range of parties, including automakers, in hedging steel price exposure. Some carmakers have previously hedged steel through iron ore futures, but the correlation between 62pc Fe iron ore and products, such as HRC, has broken down in recent years given the firmer steel market.

Derivatives market participants welcomed the LME's announcement. Amalgamated Metal Trading's head of ferrous trading, Shan Islam, said his firm "looks forward to the launch of HRC contracts expanding the LME ferrous suite".

And Phillip Price, chief exective of Ferrometrics, a market maker on the LME's current ferrous futures, said the contract would aid the market at a time of "continued price volatility".