April 9, 2013 / 5:06 PM / in 5 years

Broker FCStone targets growth in steel futures

* Iron ore is one of the most popular ferrous contracts

* Exchanges launch new contracts to cash in on market growth

* US steel scrap, coil have more chances of success- FCStone

By Silvia Antonioli

LONDON, April 9 (Reuters) - Commodity brokerage INTL FCStone sees increasing customer interest in the steel derivatives business, and wants to expand in this young sector as more players seem willing to hedge in a volatile market.

The firm, with a strong background in grains, has been expanding into metals since 2011, when it bought Ambrian Commodities and MF Global Holding’s metal brokerage team, gaining ringdealing membership of the London Metal Exchange (LME).

Although its metals focus remains base metals, the U.S. brokerage expects to see higher trading volumes this year from its steel business, which currently involves 5 staff in the United States and 3 in the UK, metal broker Spencer Johnson said in a phone interview from New York on Tuesday.

“We see strong growth potential in this market as ferrous businesses have long been under served in terms of risk management instruments, but also in terms of service,” he said.

“This is largely a function of the lack of experience some firms may have in hedging, which in turn results from the lack of any liquid futures market prior to about 2009.”

The steel derivatives market only represents a fraction of the 1.5 billion tonne a year steel trade, but the number of contracts available has multiplied in the last couple of years to reflect different steel products.

Exchanges have rolled out new contracts in response to growing demand from physical players willing to hedge to counter higher steel and raw materials volatility and also due to financial players’ interest in betting on the steel market, an indicator of economic growth.

Iron ore swaps are one of the most popular steel derivatives so far-- a 115 million tonne a year paper market against a 1.2 billion tonnes physical seaborne trade.

Among the other contracts now available Johnson thinks the U.S. steel scrap and the U.S. steel hot rolled coil (HRC) contracts launched by CME Group, have the highest chances of success.

“Iron ore trading has exploded, and the need for raw materials hedging amongst traders and steel producers suggests that a similar fate is certainly possible for scrap futures,” Johnson said, adding that in the finished steel category the HRC has been a “bright spot” in terms of liquidity growth.

“For U.S. HRC we expect consistent monthly volumes of at least 100,000 short tons based on February and March volumes which have set new records for the exchange,” he said.


Up until its bankruptcy, brokerage MF Global accounted for a very significant portion of the LME steel billet futures volumes. The LME steel futures however, have since lost popularity mainly due to a disconnect with physical prices.

Under new ownership of the Hong Kong Exchanges however, the LME intends to launch new ferrous contracts to cash in on the fledging market.

Although some steel players are sceptical of the London exchange’s capability to compete with more established exchanges in steel such as the Singapore Exchange and CME Group , FCStone said it would welcome such addition.

“The LME can leverage its reputation as the (biggest) global metals exchange and help ferrous derivatives succeed,” Johnson said.

“It seems that new contracts are inevitable given the success other exchanges have had in ferrous product listings, and we look forward to including those as part of our already extensive LME capability.”

FCStone brokers all major ferrous futures traded on North American and foreign exchanges and its swap dealing arm, INTL Hanley, offers over-the-counter ferrous products.

It does not broker steel rebar futures on the Shanghai Futures Exchange (SHFE) due to restrictions to Chinese exchanges.

“This is unfortunate as SHFE rebar remains one of the most active futures markets in China, but we are hopeful that Chinese exchanges will open their doors to foreign firms in the years ahead.”

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