Steel Futures Forging Ahead

| About: VanEck Vectors (SLX)

By Brad Zigler

James Bond fans (that's the Agent 007 Bond, not the botanist) may recall that bad guy Oddjob flung his steel-rimmed hat with deadly accurate results in the movie "Goldfinger."

Now, some four decades later, another large steel hat is being flung, this time into the trading rings of the New York Mercantile Exchange [NYM].

NYMEX just announced plans to launch steel futures contracts, joining the London Metals Exchange [LME] and the Dubai Gold and Commodities Exchange in trading the world's second-most active commodity after oil.

Well, in reality, NYMEX will trade its version of the commodity.

There'll be no physical delivery against the NYMEX contract. Instead, the contract will track an index of U.S. Midwest prices for hot-rolled steel coil developed by CRU Indices Ltd. Coiled steel accounts for 40% of domestic U.S. steel manufacturing.

The London contract is based upon two deliveries - one Far East, the other Mediterranean - of actual steel "billet." Billet, which accounts for 38% of global steel production, is made from scrap and is typically cast as reinforcing bar (rebar). The Dubai contract calls for settlement in steel reinforcing bars themselves and, in that way, acts as the model for another recently proposed product to be traded on China's Shanghai Futures Exchange.

Dubai's was the first steel contract to market, launching in October 2007, followed by London's six months later. The NYMEX contract is expected to be floated in the fourth quarter.

NYMEX's contract will be based on prices for 20 short tons (40,000 pounds) and will offer serial contracts out as far as 18 months. London's steel contract calls for delivery of 65 metric tons (143,000 pounds) for prompt delivery, and for three forward periods. The Dubai contracts are small: only 10 short tons (20,000 pounds), but can be traded with weekly and monthly deliveries.

Are you reeling yet from all the choices?

If nothing else, steel futures contracts offer a transparent way to price steel, which has traditionally been bought through direct negotiations. The NYMEX product, too, will enhance hedging opportunities for the dozen or so large steel mills in the U.S. that produce sheet products, including some that are among the 28 current constituents of the Market Vectors Steel ETF (NYSEARCA:SLX).

In this inflationary environment, however, it seems likely that buyers of steel products, most particularly automakers and the aerospace industry, are likely to be the primary beneficiaries of hedge transactions.


Market Vectors Steel ETF (SLX)

Chart: Market Vectors Steel ETF (<a href='' title='VanEck Vectors Steel ETF'>SLX</a>)


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