April 29, 2008 / 8:02 AM / 12 years ago

Steel futures find few supporters in Russia

MOSCOW, April 29 (Reuters) - London was the venue of choice for Russia’s top four steel makers when attracting billions of dollars in investment through initial public share offerings. But as the London Metal Exchange (LME) launched floor trading in steel futures on Monday, the owners of Soviet-era mills were more focused on booming demand in their domestic market, driven by economic growth in excess of 7 percent a year.

Russian mills directly supply every second tonne of steel in the world’s fourth-largest producing country. Like many of their counterparts worldwide, they do not want to surrender pricing power by committing to a futures market in steel.

“It’s difficult to say that steel is a commodity. That’s why it doesn’t make sense to treat it as one,” a trader who exports steel from a Russian mill said on condition of anonymity. “It’s not reliable. It can crash. We can do the trading ourselves.”

The LME’s regional billet contracts FMDQ8=LX FFDQ8=LX aim to provide a hedging tool and possibly a benchmark price for the $800 billion steel industry. Billets are semi-finished products accounting for about half of world steel production.

Billets are re-rolled into bars and other products used in construction — a sector that is booming in Russia as the government and private companies prepare to spend $1 trillion overhauling ageing infrastructure.

Vladimir Lisin, Russia’s fourth-richest man and owner of Novolipetsk Steel (NLMK.MM) (NLMKq.L), forecasts steel use will rise by between 60 percent and 65 percent by 2015.

“Demand in the domestic market rose 14 percent last year. This trend will continue,” Serafim Afonin, president of the Russian Union of Metal Exporters, told Reuters.

“There’s no price volatility in the domestic market. Prices are rising,” said Afonin, whose union represents almost all Russia’s steel makers.

The LME began open outcry trading in steel billet futures on Monday. Trading on its telephone market and electronic platform had begun on Feb. 25, since when volumes have been light.

“BUTS”

Russian steel suppliers echo an argument heard worldwide that there are simply too many different grades of steel to create a universally recognised benchmark.

“The basic premise of futures to insure both producers and buyers from price extremes,” said Dmitry Dvoretsky, director of commercial sales in Russia and the CIS for EvrazHolding.

“Neither producers nor buyers want high volatility in prices but there are many ‘buts’. The main ‘but’ is the many different characteristics of a product.”

EvrazHolding is the trading arm of Evraz HK1q.L, which exports 4-4.5 million tonnes of steel billet and slab annually.

Another large producer, Severstal (CHMF.MM) CHMFq.L, is also unlikely to participate in steel futures. Its main owner, Alexei Mordashov, told Vedomosti business daily in an interview this month “organising steel trading on an exchange is not possible”.

The idea finds more support further down the value chain. “It will discipline the market,” said Igor Konovalov, owner of Inprom, a steel stockholder and service centre firm with a 4.5 percent share of Russia’s steel distribution network.

Konovalov expects the percentage of steel supplied directly by mills to drop to 40 percent by 2012, more closely reflecting western European markets, where mills supply about a third.

And traders agree that interest in Russia could grow were the LME contracts to prove a success. Russian mills already have a large presence on international markets, both as exporters and the owners of mills in Europe and North America.

“These are not the same companies that were around 10 years ago,” Afonin said. “These are mature, informed participants in the market. They know the situation on the world market and many companies are oriented towards long-term partnerships.”

Dvoretsky, who sells Evraz Group’s finished products in Russia and the CIS, said rebars used in construction were the only finished product with the potential to be exchange-traded in the near to medium term.

“Other types of product — cut steel, beams — have too many different grades. Time will tell, but it’s not an issue for the near future.”

Editing by Chris Johnson

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