New York, 25 June 2010

The London Metal Exchange, after announcing plans this week to open a warehouse in New Orleans for physical delivery of its steel billet contract will have its work cut out in selling the idea to the U.S. steel industry.

In an interview with Reuters, at American Metal Market's 25th Steel Success Strategies conference this week, Chief Executive Martin Abbott said, "We will now begin a major campaign of engagement with the steel mills. For the moment, we have nothing to say about what their attitude is. But we think we'll be able to talk to most, if not all of them, over the next few weeks and months."

Abbott may have an uphill climb. During a panel discussion at the conference, North American steel producers complained about steel price volatility, but said generally they would not use a steel contract, arguing there was not enough material underlying them, not enough liquidity in the steel futures market, and it benefited intermediaries, like speculators, but not the mills.

Privately, many U.S. producers also believe steel futures will greatly diminish their power over prices, now determined more directly between steel mills and their customers. "This is the disconnect. They complain about volatility. I think some of them need to do a little bit more research, because this contract is designed to reduce the volatility," said Abbott, adding, "these objections will be overcome."

Still, he said, the LME has already received strong interest in the steel contracts from the U.S. steel community. Now a delivery point has been established in the country it makes it much easier for North Americans to participate. When asked which sectors have expressed interest, Abbott said, "Not from all of the steel industry, but we have had interest from parts of the U.S. steel industry, yes."

Beyond steel merchants and traders, he said, the LME was receiving inquiries from the U.S. scrap industry. "Because there is such a direct correlation between scrap prices and billet prices, they can see that this is a good fit for them. In exactly the same way that they price copper scrap against the copper contract, they can price steel scrap against billet and use it as a benchmark," the LME chief said.

"This is potentially a very useful tool for them." To some degree, he said, the billet contract is being used as a benchmark for steel scrap. "We've seen metal going in and out of the warehouse. The merchants are using it. Correlations between scrap and billet prices are very strong. It's the right mechanism to control a lot of the price volatility."

As volume in the contract increases, as it has in the last 3 months, it becomes a more viable tool for would-be users. In his talk to conferees, Abbott said turnover, liquidity and futures contract terms were growing all the time. For now, large orders can currently sit with a broker, who will match the order with someone on the other side as it shows up, either all at once or piecemeal, depending on interest.

By listing New Orleans as a delivery point for the billet contract, the LME has created the first physically delivered steel futures contract in North America. A North American delivery point is "central" to the exchange's initiative to merge its two regional steel billet contracts -- Mediterranean and Far East -- to create a single global contract.

The move is due to take place on July 28.

Abbott said the LME was looking to add more U.S. locations, "in a matter of months, not years." "We're not naming any of those yet, but it's fair to say that there are a number of other obvious delivery points in North America that we could look to list," he said.

Noting speculation has centered around warehouse locations in Chicago, Philadelphia, Toledo, Detroit, Abbott said, "We can't confirm that, but those are all locations that a rational person would say are obvious choices." The chief executive said the LME was actively investigating other locations right now.

In Europe, "We're looking at more locations. We certainly would be interested in another Mediterranean location." In other matters, Abbott said, LME was working out details in its partnership with the London Bullion Market Association for distribution of a new gold forward curve.

"We're still in detailed discussions with them. It's a complex project. We have the systems. We have everything ready. LBMA has to do some work as well. We're in the sleeves rolled up, hard work stage of the project at the moment." He said to expect an announcement this summer.

Ends --

By Carole Vaporean, Reuters - for Commodities Now