Wanted: Traders for China's Steel Futures

飞雪寒冰

Greater participation in steel contracts trading is a key to advancing China's newest futures market, protecting Chinese steel companies from price fluctuations, and breaking the price monopolies of international iron ore giants, an industry expert says.

China Chamber of Metallurgy Industry Deputy Chairman Tang Liang is promoting the fledgling futures market while shrugging off concerns about speculation. He said there's no need to worry because large-scale and "legitimate" speculation actually reduces price manipulation risks.

Moreover, Tang said growing pains are normal for a young futures platform such as the steel contracts market, which opened March 27 on the Shanghai Futures Exchange.

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So far, the exchange has been approved to handle trading in contracts for rebar and steel wire. Regulators gave the market a green light in February.

Tang, whose organization operates under the All-China Federation of Industry and Commerce, said futures pricing supports the side of Chinese steel mills in their price negotiations with overseas iron ore suppliers.

China is the world's largest steel producer and iron ore consumer, but the country has had little say over price setting for international iron ore. And since 2005, Chinese steel mills have had to accept price hikes from major iron ore suppliers, which in turn triggered calls for domestic steel futures trading.

Tang said widely fluctuating steel price in 2008 contributed to big losses for Chinese steelmakers, before futures trading began. But existing futures markets for other products benefited Chinese companies that use nonferrous metals such as copper, aluminum and zinc, despite similar price fluctuations last year for those materials.

"The launch of steel futures will help enterprises avoid risks from changing prices," Tang said. "It will also support Chinese steel mills against the iron ore price monopoly of major international suppliers."

Tang emphasized that broad participation by steel producers, dealers, customers and investment institutions will be needed for China's steel futures market to achieve its goal to function as an industry guide. But he said an efficient trading mechanism will attract participation by enterprises that demand an economic, convenient and credible trading system.

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According to Tang, China should encourage more steel producers and dealers to participate in futures trading. He also wants to attract more institutional investors.

Steelmakers currently sell products directly, through subsidiaries, or via China's estimated 150,000 dealers, who handle about 60 percent of all transactions. Getting these players involved would enhance futures trading.

"Without participation by a large amount of capital, the market would be less active and unable to adequately reflect prices," Tang said. "It would eventually fail in helping companies achieve the right to set prices."

Tang added that whether the futures market's can effectively help companies offset risks will depend on whether there is enough room for speculators.
   
Some steel producers are worried that speculation will cause price fluctuations. But Tang rejected those fears, pointing to the global oil market, where dramatic price fluctuations in recent years increased profits for oil producers.

In addition, Tang said China's steel futures market should be more open to foreign companies and investors. Introducing more foreign players would be in line with Shanghai's strategy to become an international shipping hub.

According to exchange trading rules, steel products for the first batch of future contracts due in September must be produced after mid-June. Industry insiders were recently quoted by the Shanghai Securities Journal as saying that the gap between spot and future prices for steel products will narrow in the future.