A year into their launch of the London Metal Exchange’s two steel billet futures contracts, have exceeded the expectations of many in the industry. Although many steel makers remain staunchly opposed to their introduction, a growing portion of the physical industry has welcomed the contracts and more and more players are looking at adopting their use in their day-to-day business.
Open interest and traded volumes have consistently grown, especially for the Mediterranean contract, and the exchanges official prices have reliably reflected business being concluded in the physical market. The exchange has now appointed the first steel-specific firm as one of its members. The LME approved Total Global Steel as a trade member of this exchange.
The company was delighted to have become a part of the LME and steel futures community and, having identified the potential in the LME’s steel contracts, Total Global Steel plans to add another service to its business, says CEO Martin Lonergan.
“We are fully supporting the LME’s two billet contracts and will do everything we can to market them,” he says. “In today’s steel market the risk management opportunities that these contracts offer will be invaluable, not just to our company but also to our customers and suppliers and companies throughout the steel supply chain.”
As a result, Total Global Steel plan to take a key role in bringing those steel companies that wish to get involved to the contracts, Mr Lonergan continues.
Total Global Steel is authorised and regulated by the Financial Services Authority (FSA) and offers access to steel price risk management for those steel participants that will be unable to do so directly through members of the exchange.
“Particularly in the present climate, many of the banks that are members of the exchange are reluctant to offer credit lines to a wide variety of steel companies, particularly given that so many companies in the industry operate with such narrow margins,” he explains.
“At the same time there are a lot of steel companies that only want to hedge a few hundred to a few thousand each month,” he continues. “Given that each LME contract is for 65 tonnes, this only equates to a few lots each month. This will not bring in enough revenue to make it worth the category.” Total Global Steel are able to offer a service to these difficulties. Following a buy or sell order from one of its customers, Total Global Steel will enter into the relevant LME position, depending on the market available at that time. Simultaneously, the company will then enter into an over-the-counter contract with the customer.
When the two positions come to fruition, Total Global Steel will close its LME position and settle the OTC transaction with its customer at the same price. “What we offer is market access. We are able to give companies that would otherwise be at the mercy of price volatility access to steel price risk management. The steel business does not have to be about speculating. Participating in the steel futures market will enable companies to develop so much more and encourage entrepreneurship in the industry, rather than gambling on what the price of steel will be tomorrow.”
“At the moment there is an attitude in the steel industry, particularly held by mills, where companies will try and make as much money as possible in the first six months of the year and hope that it will be enough to take them through the second half of the year,” Mr Lonergan adds. “This just isn’t a practical way to run a business.”
“If you’re asking someone to invest in you, you’re asking them to buy in your bottom line,” he continues. “Being able to lock in forward prices gives steel companies the ability to present a much more attractive prospect to investors.”
Total Global Steel has already begun indentifying areas of the industry that will stand to benefit from the LME’s steel contracts and, most recently, has begun talks with several major UK stockholders with regards to pricing construction steel for Olympic development projects in relation to the LME’s Mediterranean contract.
“The LME provides a solid and proven risk management system through its contracts, which we fully support and for which we provide quick and easy access to the metals industry,” he adds.
Total Global Steel is not just setting its sights on the steel industry – since becoming a member of the LME the company has also expanded its physical trading operations to smaller companies that have found access very difficult in the past.