The London Metal Exhange(LME)announced on November 30 that it will suspend Detroit,Chicago,New Orleans,Dubai,Johor and Incheon as billet delivery locations on the LME steel billet contract.The LME has thus retreated from the US market,after only two and a half years since it listed its first locations in the US as points of good delivery for its steel billet contract"to further support the use of the LME's hedging tools by market participants in the US steel industry"back in June 2010.
The suspension of the US locations came just before the completion of LME's acquisition by Hong Kong Exchanges and Clearing Limited(HKEx)on December 6,following the announcement of the acquisition decision in June this year.Regarding the acquisition,HKEx chief executive Charles Li had said,"HKEx's ability to help the LME grow its business in Asia and beyond provides significant opportunities for both parties,"signaling the beginning of a new period in the LME's 135-year history.
Against the backdrop of the significant changes affecting the LME in general and the LME's steel billet contracts in particular,Chris Evans,LME's head of business development,answered SteelOrbis'questions relating to developments in the marketplace.
It seems that the LME has not had great success in persuading the steel industry of the effectiveness of their steel billet contracts.The LME billet contract market had for quite a while been expected to deepen.However,after a certain peak level,the trade volume has declined significantly,as the physical market has remained sluggish this year.And then came the rupture with the physical market.How do you evaluate this period,what are the causes that brought the situation to this point?
We are refocusing the billet contract on Turkey,the Black Sea and Europe,areas where the merchant billet market is at its most vibrant.This should help improve liquidity and also price convergence between the LME and the physical market.
The US market has better experience in futures trading.However,the LME first delisted its locations in the US.What went wrong?
Turkey has a bigger merchant billet market than the US and so that is the market our contract needs to serve.
What will happen to billets sitting at US warehouses?What is the volume of billets in the US?Will you consider moving them into other warehouses,with the risk of high transportation costs?Or will you supply them to the US domestic market?
Any steel billet on LME warrant remaining in the delisted locations on the delisting date(May 30,2014)will be moved to another LME-approved warehouse at the expense of the warehouse company concerned.As of December 19,there are 42,770 metric tons of steel billet in US locations.
The LME billet price is currently at about$300/mt,compared to$515/mt FOB for ex-Black Sea billet,and the LME still has 55,700 mt of billet in its warehouses.Please correct me if I miss something,but who would not like to buy billet for$300/mt?
We anticipate that the gap between the Black Sea price and the LME price will narrow following the changes to the contract.The current gap has arisen because of the length of time needed to take delivery of steel from US warehouse locations.
We know that China has an established futures market tradition.After the acquisition of the LME by HKEx,what are your projects for Far Eastern markets?Contracts on RMB basis were reportedly planned to be launched.What sort of opportunities are you expecting?
For now,our focus for steel is on helping the industry in Turkey to manage risks using our existing products.
