MEPS declines to join race to provide steel prices for futures contracts
http://www.oriental-cherry.com Industrial trend 5/26/2006
MEPS supplies the world 's most comprehensive range of steel price data. But we are not entering the race to provide prices to commodity exchanges for use in steel futures trading. We have doubts about both the methodology of price formulation for this purpose, and the practicalities of steel futures.
In order to meet the regulatory requirements of commodity exchanges, the steel prices that form the basis for trading must meet certain standards of verifiability. These include creating an audit trail ? a documentary record of how the prices were arrived at.
In our view, this will do nothing to guarantee the accuracy of the prices. The fact that a figure can be traced to its original source verifies only that it has not been invented. It does not ensure that the price is accurate.
It would clearly be advantageous to recruit the largest possible number of people to provide price data. But casting the net wide does not guarantee that you catch the biggest fish. If they have to be involved in an audit trail, many of the world 's largest steel buyers would decline to participate.
The recent roller-coaster ride in world commodity markets does not bode well for steel futures. Prices for non-ferrous metals have been driven up to record highs by pressures that have less to do with the basics of supply and demand, and more from speculation by investment funds. In mid-April the inevitable correction took place and metal prices tumbled ? for nickel and zinc by as much as 7 percent in a single day. This was attributed purely to "sentiment". Market fundamentals had not changed significantly. The world steel market measures more than 1,000 million tonnes. It would be absurd to have the price of this physical metal determined by dealings between financial speculators who have their own agenda.
Many of our subscribers are using MEPS prices in their contracts. These data do not provide a hedge against future price changes, but they do give a different sort of safeguard. This is a guarantee that people using our prices are no worse off than their competitors. This is a benefit to both buyers and sellers.
In contrast to the verifiable audit trail, MEPS obtains its price information on a confidential basis from contributors who are guaranteed anonymity and ? therefore ? are more open and honest in what they tell us. We also exchange information about prices and commercial conditions with our contributors ? establishing a dialogue with the market. This is important to the accuracy of our price data. In an audit trail, most of the information will flow one way. Focusing the contributors on providing mill prices for a specific grade, in a consistent product form can be an ever present problem without regular dialogue.
Most steel buyers see their skills as understanding market tendencies and assessing the turning points. This gives them the opportunity to have material available for fabrication at times of shortage and minimum stocks when oversupply develops. At the same time, steel mill executives pay close attention to market movements and attempt to adjust output when excess or tight supplies develop. MEPS transaction prices reflect these market fundamentals.
The instability created from speculation by investment funds could make some of these skills null and void and leave both buyers and sellers with a new set of volatile reference prices which bear no relationship to market supply and demand.
Futures trading offers the opportunity to hedge, but this is something that not many steel market participants seem to crave. At a meeting earlier this month, US steel producers and service centres either opposed futures trading or played down its likely significance. Steel futures may be taken up by certain steel mills and a limited number of buyers who currently operate on one year contracts and need to lock in a guaranteed price forward.
Custeel.com (www.custeel.com 2006-05-26 11:01:00.0)
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