Basson: Worldsteel re-evaluates stance on steel derivatives

The World Steel Association is evaluating whether to change its official stance on the role of derivatives-based trading tools for the steel industry.

In an interview with Platts Steel Business Briefing on the sidelines of the organization’s annual meeting in New Delhi, director general Edwin Basson said several years ago “the industry came out and said they are not in favour of developing a derivative market for steelmaking raw materials.” That position remains in place, but the constant volatility seen in the market since that time has some industry officials reconsidering.

“Part of the question is, well, ‘is that still the correct stance or not?’ As things stand, we are actually in the process of evaluation of this issue, but answers will only be forthcoming in the early part of next year,” Basson said.

“There’s a real desire in the steel industry to understand what to do (to tame pricing volatility). Some of our members, if I go back three years ago, were very much against the development of a futures market. Others were less so, but there is no clear consensus, I think, even today about whether this is good or bad and whether you would like to or not like to look at these things.”

He said his “personal view is that very few of these are, at the moment, mature. Mature in the sense of having sufficient paper trade that the futures market in itself can begin to act as a price discovery mechanism. And this is really, I think, the open question. Given today’s market conditions, given the variety of views around the feasibility or not of these markets, whether these market are going to mature, and if so, how fast.”

Basson said Worldsteel’s raw materials committee is evaluating these questions, specifically regarding iron ore. “At one level, you already have a very, very flexible market with very, very quickly changing conditions period to period. And the question mark there is will we get a fully functioning futures market on iron ore?” he said.

“The second question is, will this thing sort of jump across the fence and what will happen in the coking coal market? Probably in the coking coal market you will typically see the same kind of development, firstly more regularity in contracting behaviour on coking coal, and that could potentially then become the basis for some futures trading side.”

On the finished steel side, Basson said there are competing views on the benefits of utilizing futures trading tools. “I think the key question to be sorted out, if you look at the finished steel product market … whether you go for something which utilizes the physical settlement, like the LME’s existing one, or something that settles against some index, as CME is doing,” he said. “You have proponents of both schools and both of them are giving very good reasons why their system is the best. Again, we need to see if we want to make a statement in our steel industry and this is part the evaluation that we are for the moment looking at.”

Basson admitted that many members remain staunchly opposed. That sentiment was reiterated by Tata Steel Europe CEO Karl-Ulrich Koehler during a press briefing at the conference. “We don’t like it,” Koehler said, simply.

Asked if there was any interest in migrating toward more financial-related pricing systems as there is for aluminium and stainless products, Koehler noted it would be much more complex to apply similar tools in the steel market due to its sheer size, by comparison.

Both the aluminum and stainless markets produce less than 50m tonnes/year, while the global steel market typically delivers more than 1.5 billion t annually.