Shanghai steel futures shine on first day of trading

The Shanghai Futures Exchange launched trading in steel futures on March 26 to modest success, with a wide range of trading houses supporting the new contracts, traders and analysts said. The two new contracts are the seventh and eighth products to be traded on the exchange in its 10-year history.

The exchange is offering futures contracts with steel wire rod (product code wr) and reinforcing steel bars (rebars) (product code rb) as the underlyings, and there are seven tenors offered on both products for delivery from September 2009 to March 2010.

Trading in the rebar contracts was opened at 3,399 renminbi ($498) for all seven tenors, and trade in steel wire rod opened at 3,199 renminbi for all seven tenors. Each contract represents 10 tonnes of the underlying.

Rebar for September delivery (rb09) closed up 162 renminbi at 3,561 renminbi with a total of 354,590 tonnes traded. This was nearly twice the volume of aluminium traded on the exchange on Friday, but well below copper, where a total of 582,338 tonnes was traded. Copper closed down 150 renminbi at 33,220 renminbi. Steel wire for September delivery (wr09) closed 199 renminbi higher at 33,998 renminbi on trade of 105,170 tonnes.

Traders are required to put up a minimum 7.0% of the value of the contract as margin. The last trading day for a given contract will be the 15th of the month. Whether in anticipation of continued volatility in steel product prices or as a reflection of the characteristics of steel and iron prices, the exchange set its circuit breakers at 10% above and below the opening price on a given day, twice as wide as the 5% price fluctuation permitted for base metals prices (copper, aluminium, zinc and nickel) before trading is halted.

According to the China Iron and Steel Association, China produces 97 million tonnes of rebar and 80 million tonnes of steel wire, which together total 177 million tonnes or 13% of the world total steel output.

After years of slow steady price increases, iron ore and steel prices have turned volatile in 2007, prompting a search for hedging and better risk management tools from producers, traders and fabricators. Steel futures have been launched on the London Metal Exchange (LME), the New York Mercantile Exchange (Nymex), the Dubai Gold and Commodities Exchange (DGCX) in the past 18 months. The Nymex contract has hot roiled steel coils as the underlying and is cash settled only. The LME trades steel billet for physical delivery in the Mediterranean and the Far East. The Dubai exchange also trades rebar contracts for physical delivery.