London Metal Exchange launches two new futures contracts

The London Metal Exchange has launched two new ferrous contracts, LME Steel Scrap and LME Steel Rebar. The LME says the new futures have been designed to meet the needs of the metal and trading communities at a time of great change for the steel supply chain.

The new contracts are cash-settled against leading benchmark prices from Platts and TSI, and are designed to provide new routes to trade steel futures and protect against price volatility.

LME says the new contracts, developed in response to market demand, are also designed to complement its existing ferrous contract, LME Steel Billet, and to meet the needs of the metal community for new risk management tools.

The new contracts complete the production value chain for long steel, from inputs (LME Steel Scrap) through semi-finished stages (LME Steel Billet) to finished products (LME Steel Rebar), the exchange says.

The combination of steel billet with the new scrap and rebar contracts is intended to deliver the optimal balance between physically-settled and cash-settled contracts. Maintaining a physically-delivered billet contract helps to ensure price convergence, and will act as the core of a suite of products which can then be cash-settled, enabling the market to trade spreads back to the billet contract, LME says. The exchange adds that having this ability benefits physical customers as it allows them to hedge every step of the value chain, while also giving financial players the opportunity to arbitrage between different stages of the chain.

Furthermore, LME reports, it has introduced a market-making programme to support the launch of the two new ferrous contracts. The programme is part of an LME initiative to enhance participation and liquidity on the LME.

From 4 January 2016, LME also will introduce a liquidity provider programme for steel scrap and rebar. The programme will offer volume-based discounts to approved providers for trading on LMEselect within specified threshold bands, LME says.

Additional information about the new contracts, including factsheets, pricing information and LME focus pieces are available at http://lme.com/metals/ferrous.