Introducing Hot Rolled Futures

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Includes: DBB, JJM, SLX
by: David Enke

The New York Mercantile Exchange is planning to introduce a futures contract that is based on U.S. Midwest market prices for hot-rolled steel coil (see WSJ article). The steel contracts are expected to be offered later this year in the fourth quarter, and be settled against an index developed by CRU Indices Ltd.

The futures contracts offer a new way to price steel, which is typically bought through direct negotiations. The move comes at an interesting time considering that many in Congress and elsewhere are blaming speculators in part for the recent moves in crude oil price. Some steel company executives have also resisted steel futures since they too feel that the new futures market will only benefit speculators. On the other hand, a futures market will allow for more consistent pricing and less dumping into competitive markets. The futures market may also keep companies from bidding against themselves, not to mention allow smaller companies without negotiating power to work on a more level playing field.

Of course, beyond helping to eliminate the dumping of steel, a futures market will open up the potential for companies to hedge their steel cost. Given the increased costs of the energy, coking coal, and other raw materials needed to produce steel, the ability to hedge steel cost could not come at a better time for the automobile makers, aerospace industry, and other large users of steel. Therefore, while a potentially good development for companies such General Motors (NYSE:GM), Ford (NYSE:F), and Boeing (NYSE:BA), the move towards steel futures is probably less good news for larger steel makers, such as U.S. Steel (NYSE:X), Arcelor Mittal (NYSE:MT), and Nucor (NYSE:NUE).