UPDATE 3-China steel futures debut; victim of own success?

* Steel futures trade tops 400,000 lots in debut

* Open interest signals day traders closing positions quickly

* Undermined by success if mills shun speculative market (Updates to closing prices, adds fresh quotes)

By Alfred Cang

SHANGHAI, March 27 (Reuters) - China's first major steel futures contracts bolted out of the gates on Friday, but the dominance of domestic day traders risks undermining efforts to create a global benchmark in the world's biggest producer.

The two construction steel products on the Shanghai Futures Exchange climbed well above their base prices on expectations that stimulus spending will lift prices, and trading activity was unexpectedly heavy, a big departure from previous attempts by four rival bourses, which are still struggling with thin volume.

The real challenge for Shanghai will be convincing big mills like Baosteel (600019.SS) to hedge risks in a market they fear could undermine their pricing power and heighten volatility, especially after Friday's activity pointed to the kind of rampant speculation that ultimately sank steek contracts 15 years ago.

"Trading volume was quite good today but most of them are speculative trades and many traders closed their positions hours after the opening," said Wang Jinbiao, an analyst at HNA Topwin futures.

Steel rebar futures for September delivery SRBU9 closed up 4.8 percent to 3,561 yuan ($521.3) a tonne, after rising as much as 7.8 percent. Trading volume topped 354,000 lots.

That's equivalent to about 3.5 million tonnes of steel, dwarfing the meagre 5,000 tonnes for the most active contract on the London Metals Exchange (LME) in the first four days of trade after it launched steel contracts a year ago.

The global industry produces 1.3 billion tonnes, nearly 40 percent of that in China, and experts say futures trade needs to rise to at least 5 to 10 percent of that before claiming success.

The September wire rod contract SWRU9 also rose 6.2 percent to 3,398 yuan, after rising as much as 9.4 percent earlier.

Open interest figures pointed to traders rapidly opening and closing positions, effectively day trading in the new contract, although some long-term industrial users who could use the contract to limit price risks also took part.

"We traded rebar today and will do some more trades after reviewing our sales, inventory levels as well as market conditions to decide appropriate hedge risks," said an official from Shagang Group, China's top privately owned steel mill.

But traders and analysts said that some market makers and mills making exchange-registered steel products may have been asked to actively participate in the first day of trading.

The futures prices also mark a sharp gain from spot prices, suggesting traders expects a quick recovery in Chinese demand as it plans to spend nearly $600 billion to prop up the economy.

The spot price of 6.5 mm wire rod is quoted at around 3,220 yuan a tonne in Shanghai, according to data from Steel Home.

Chinese spot benchmark hot-rolled coil prices have fallen by more than half since their peaks early last year as a global recession sapped demand. They edged up 1 percent this week to around 3,363 yuan, ending six weeks of losses. [ID:nSEO75688]

GLOBAL RACE

The launch by China, which joins four global bourses trading steel, comes as global steel mills are relaxing their resistance to futures. With steel prices having collapsed amid a global recession, the allure of managing price risks has risen.

"Given that the overall volume of the Chinese steel market, we believe the futures market may have a global influence," said Ming Noh, an analyst at Woori Investment & Securities in Beijing.

"But considering that only rebar and wire rod will be traded initially... there will be only limited initial participation."

Rebar and wire rod account for more than 30 percent of 500 million tonnes of annual steel output in China.

But both in China and outside it there remains a lot of uncertainty about using derivatives among big companies. The advantage for the Shanghai exchange is China's 170,000 small-scale steel trading firms eager to lock in low prices.

That may help short-term liquidity, as evidenced in Friday's trade, but a real benchmark will likely remain elusive until the world's big mills become regular participants.

"There is going to be a market in steel trading, the question is whether it will be supported by steel manufacturers... If trading grows to 5-10 percent of all purchases, then it will have an impact on pricing," said Michael Locker at steel consultant Locker Associates.

For details on the Shanghai contract click: [ID:nSHA334355]

For a factbox on global steel futures: [ID:nSEO373490] ($1=6.831 Yuan) (Additional reporting by Steve James in New York; Writing by Miyoung Kim; Editing by Jonathan Leff)