UPDATE 1-China rolling out steel futures mart; U.S. cool to it

Thu Mar 26, 2009 4:47pm EDT

* Shanghai to start steel futures trading

* U.S. manufacturers cool to idea

* Steel stocks rise on positive economic signs (Recasts, adds U.S. steel stocks closing higher)

By Steve James

NEW YORK, March 26 (Reuters) - A new steel futures market in the heart of the world's largest producer and consumer of the metal is a major event for China, but has failed to convince most U.S. manufacturers of the value of publicly trading derivatives based on their products.

On Friday, China's Shanghai Futures Exchange will join four other global marts offering steel derivatives to set a benchmark price for the 1.3-billion tonne-per-year industry.

The exchange will start formal trade of two construction steel products -- reinforcing steel bar and wire rod. But in the United States, the news of the new exchange brought widespread grumbling.

"Many of our members do not support it," said Nancy Gravett, spokeswoman for the American Iron and Steel Institute (AISI), a major steel producers' lobbying group.

"They see it as benefiting traders and not adding value to the producer/customer relationship," she told Reuters in response to a question about the opening in Shanghai.

Already, steel futures are traded on the London Metal Exchange, the Dubai Gold and Commodities Exchange, the Chicago Mercantile Exchange and India's National Commodity & Derivatives Exchange.

But since the Chicago exchange started trading in hot-rolled coil steel futures last October, the idea has been slow to spread to other markets in the United States.

Dan DiMicco, chief executive of Nucor Inc (NUE.N) said at an AISI conference late last year: "We do not see steel futures as a good thing. We're not big fans of an idea that puts anybody between ourselves and our customers and tries to make money off both of us, and does it in a way that isn't necessarily sound and ethical all the time."

Keith Busse, CEO of Steel Dynamics (STLD.O) agreed at the same conference: "I think it has to add value, and I don't know that it has done so.

"Steel is not quite as generic a commodity as some think. I don't think it's going to be supported physically -- and if it isn't, I doubt that it will be a success," Busse said.

ArcelorMittal USA (ISPA.AS)(MT.N) said in a statement on Thursday: "We do not believe that financial institutions speculating on steel prices will bring any benefit to the long-term sustainability of our industry."

TWO SIDES OF THE COIN

But many analysts and steel industry observers support the idea of futures trading.

"It makes sense, especially in view of the volatility of steel prices in the past year, where we have seen some products double in price and others halve," said analyst Charles Bradford, of Bradford Research.

"Customers were left holding the bag with high-cost inventories," he said. "If there was trading, they could have hedged. If you are a company using steel, you need to know what the costs are, (which) steel companies won't give."

He said that manufacturers tend to regard pricing as proprietary information. "But the fallacy of their argument is that customers know what they are charging.

"We have seen the downside (of prices) without trading. But if there had been trading they would have blamed trading. Their argument is moot, they really should trade," Bradford said.

Michael Locker, of Locker Associates, a steel industry consultant, said futures trading is inevitable. "There is going to be a market in steel trading, the question is whether it will be supported by steel manufacturers.

"There will be a resistance level," he said. "If trading grows to 5-10 percent of all purchases, then it will have an impact on pricing.

"Theoretically, it should dampen volatility, but there has been volatility in other commodities where there was trading," said Locker.

Shares in U.S. manufacturers rose on Thursday on economic signs seen as positive for the steel industry. The U.S. government announced a rise in durable goods orders and new home sales, while the finance director of mining giant Rio Tinto (RIO.L)(RIO.AX) said the crash in metals prices may have nearly run its course.

On the New York Stock Exchange, U.S. Steel's (X.N) stock closed up 5.4 percent at $24.74, Nucor's (NUE.N) rose 5.1 percent to $41.09 and AK Steel (AKS.N) was 1.1 percent higher at $8.09. On the Nasdaq, Steel Dynamics (STLD.O) shares closed 7.3 percent higher at $9.74. (Reporting by Steve James; Additional reporting by Alfred Cang in Shanghai; Editing by Patrick Fitzgibbons, Gary Hill)

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