DECLINES TO JOIN RACE TO PROVIDE STEEL PRICES FOR FUTURES CONTRACTS
MEPS supplies the world’s most
comprehensive range of steel price data. But we are not entering the
race to provide prices to commodity exchanges for use in steel
futures trading. We have doubts about both the methodology of price
formulation for this purpose, and the practicalities of steel
In order to meet the regulatory
requirements of commodity exchanges, the steel prices that form the
basis for trading must meet certain standards of verifiability.
These include creating an audit trail – a documentary record of
how the prices were arrived at.
In our view, this will do nothing to
guarantee the accuracy of the prices. The fact that a figure can be
traced to its original source verifies only that it has not been
invented. It does not ensure that the price is accurate.
It would clearly be advantageous to recruit
the largest possible number of people to provide price data. But
casting the net wide does not guarantee that you catch the biggest
fish. If they have to be involved in an audit trail, many of the
world’s largest steel buyers would decline to participate.
The recent roller-coaster ride in world
commodity markets does not bode well for steel futures. Prices for
non-ferrous metals have been driven up to record highs by pressures
that have less to do with the basics of supply and demand, and more
from speculation by investment funds. In mid-April the inevitable
correction took place and metal prices tumbled – for nickel and
zinc by as much as 7 percent in a single day. This was attributed
purely to “sentiment”. Market fundamentals had not changed
significantly. The world steel market measures more than 1,000
million tonnes. It would be absurd to have the price of this
physical metal determined by dealings between financial speculators
who have their own agenda.
Many of our subscribers are using MEPS
prices in their contracts. These data do not provide a hedge against
future price changes, but they do give a different sort of
safeguard. This is a guarantee that people using our prices are no
worse off than their competitors. This is a benefit to both buyers
In contrast to the verifiable audit trail,
MEPS obtains its price information on a confidential basis from
contributors who are guaranteed anonymity and – therefore – are
more open and honest in what they tell us. We also exchange
information about prices and commercial conditions with our
contributors – establishing a dialogue with the market. This is
important to the accuracy of our price data. In an audit trail, most
of the information will flow one way. Focusing the contributors on
providing mill prices for a specific grade, in a consistent product
form can be an ever present problem without regular dialogue.
Most steel buyers see their skills as
understanding market tendencies and assessing the turning points.
This gives them the opportunity to have material available for
fabrication at times of shortage and minimum stocks when oversupply
develops. At the same time, steel mill executives pay close
attention to market movements and attempt to adjust output when
excess or tight supplies develop. MEPS transaction prices reflect
these market fundamentals.
The instability created from speculation by
investment funds could make some of these skills null and void and
leave both buyers and sellers with a new set of volatile reference
prices which bear no relationship to market supply and demand.
Futures trading offers the opportunity to
hedge, but this is something that not many steel market participants
seem to crave. At a meeting earlier this month, US steel producers
and service centres either opposed futures trading or played down
its likely significance. Steel futures may be taken up by certain
steel mills and a limited number of buyers who currently operate on
one year contracts and need to lock in a guaranteed price forward.
Source: MEPS - International
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