DGCX launching steel futures next month

The DGCX contract is designed to offer the steel industry a tool to reduce price volatility. (Getty Images)

The Dubai Gold and Commodities Exchange (DGCX) will launch its long-planned international rebar futures contract on October 29, offering the steel industry a tool to reduce price volatility, the exchange said on Sunday.

The $500 billion steel market lacks a transparent global benchmark for setting prices or hedging risk. Futures contracts would allow manufacturers and customers to lock in prices and the Dubai contract looks set to steal a march on planned rivals in New York and London.

"With the introduction of futures in steel, the physical steel supply chain will be in a better position to fight price volatilities, which were estimated to be in excess of 15 to 20%," John Short, DGCX director of steel and base metals, said in a statement.

"The boom in the region's construction industry and the volatility in the steel prices necessitated the introduction of price risk management tools in the steel sector."

Openly traded futures would also allow financial market speculators to bet on whether steel prices rise or fall, just as they do in base metals, energy, currencies and stock markets.

The Dubai steel contract will be for reinforcing bar (rebar), used in construction. Each contract will be for 10 tonnes of grade W460 rebar of 12 metres.

The rebar contract will be accessible to international investors, unlike steel contracts in India and China, which are only for domestic market participants, the DGCX said.

Not all steel makers, however, have been warm to the idea of futures trading.

Lakshmi Mittal, president and chief executive of Arcelor Mittal <ISPA.AS> <CELR.PA> <MT.N>, the world's biggest steel producer, has dismissed the idea of a steel futures market as a way of controlling price volatility.

Sabic on board

The exchange said it has an initial batch of approved producers for the contract including the largest Gulf Arab steel producer, Saudi Basic Industries (Sabic), Saudi Arabia's Al-Tuwairqi Group and Qatar Steel.

At the launch, the DGCX will list three delivery months - initially December 2007, January 2008 and February 2008, it said. Additional delivery months and a weekly delivery cycle will be added as market liquidity grows, it added.

The steel contract is the first of four contracts targeted at the steel supply chain that the DGCX plans to issue.

The three others are for stainless steel, flat products and freight. Short has said they were not planned to start trading for at least 18-24 months.

The bourse is banking on demand in the world's biggest oil-exporting region where more than $1 trillion is earmarked for infrastructure projects.

Gulf demand for rebar, which accounted for 5.8% of global consumption in 2006, was expected to grow at around 9% a year from 2005 to 2010, three times the rate of global demand growth, the exchange has said.

The New York Mercantile Exchange, the world's largest physical commodities exchange, said in July it plans to launch a steel futures contract this year.

The London Metal Exchange, through which most of the world's industrial metals are traded, aims to start trading two steel futures contracts in April.

The Shanghai Futures Exchange has been trying to launch rebar and steel wire futures for well over a year, but the exchange still lacks support from China's steel industry.

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