Bear market may lure steelmakers into futures

LONDON (Reuters) - Conservative steelmakers still shun the idea of steel futures because they are reluctant to give up their pricing power, but brokers hope a recent collapse in prices could convince them to take part.

Major exchanges around the world are racing to come up with hedging and risk management products for the $700 billion industry -- one of the world's biggest raw material markets.

Launched in a blaze of publicity earlier this year, London's steel futures are picking up, but with major producers snubbing the idea, a mature and liquid market is still years away.

The architects of the latest steel futures launch, the London Metal Exchange, say they are happy with the level of interest so far, but brokers say a leading producer would accelerate the trading pace.

"We need champions," said Peter Sellars, Chief Executive of RBS Sempra Metals, one of the most active brokers in the LME's steel contract. "It certainly needs the producers to be willing to adopt the LME pricing strategy and that will take time."

So far, it has been the financial community -- banks and brokers -- who have committed time and resources into the steel futures idea, along with several steel traders who seek to offer a fixed price to their customers.

But now with a bear market -- steel demand shrinking and prices collapsing across the board -- brokers hope producer activity could also pick up.

Theoretically, when prices are rallying to record highs and demand is high producers have little incentive to sell their output forward as they have the upper hand in pricing.

Abe Ulusal, steel futures broker at Mitsui Bussan Commodities, said they have started receiving some requests from mid-sized producers to hedge via steel futures.

"The fact that prices have halved in ten weeks has boosted interest from the producers -- that was not the case a month ago," Ulusal said.

NO NEED TO HEDGE ?

Global steel prices rallied to record highs earlier this year, buoyed by demand from emerging countries. But with the global slowdown spreading, prices have collapsed and forced producers to cut production.

Ulusal said interest is mainly coming from mini-mills -- which by definition produce up to around 500,000 tonnes and who cannot raise prices like their bigger rivals.

Major steelmakers still have not changed their mind.

"There is no need to hedge," said a spokesman for the Austrian steelmaker Voestalpine (VOES.VI). "If steel demand and prices go down, you need to negotiate raw material prices lower and we can do this on a contract basis."

The producers' main argument is that steel is not a commodity but a tailor-made product, which is priced as a result of negotiations between producers and their customers.

In addition, a futures market would involve other financial players from outside the steel industry and their involvement could distort prices.

"All the crisis we're seeing is because of the derivatives. So the steel industry should ask whether they want more derivative products," Lakshmi Mittal, Chairman and the Chief Executive of the world's biggest producer ArcelorMittal (ISPA.AS), told a recent news briefing.

But the exchanges and brokers are not discouraged at all.

In a week's time, the world's largest derivatives exchange, CME (CME.O) will launch a U.S. Midwest Domestic Hot-Rolled Coil (HRC) steel futures contract. The contract will be financially settled against an index developed by CRU International.

"I am very excited about this," said Charlie Hatton, a senior vice president at brokerage MF Global. "Several mills, distributors and fabricators of every description are already pricing under the CRU index -- this has a very good constituency right from day one," he said.

Traders said the general sentiment from the industry has turned more positive in the past year, with crashing prices forcing the industry to consider hedging.

"I'm sure right now there is a lot more serious conversation going on about how to make use of a futures contract, than there was like six months ago," Martin Abbott, Chief Executive of the London Metal Exchange, told Reuters in an interview.

Several draw similarities to the story of LME's aluminum contract, one of the most liquid at the Exchange. It took more than a decade for that contract to gain traction as the producers strongly opposed it at the beginning.

"I think steel will become established more quickly than aluminum," Abbott said. (Reporting by Humeyra Pamuk; editing by Peter Blackburn)