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Sat 13 Oct 2007 04:00 AM

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Contractors to reap the benefits of steel deals

Lauren Willington looks at the potential benefits for suppliers and contractors alike as the new steel rebar futures contract is launched.

Preparation has been underway for months and, at the end of October, the steel rebar futures contract will be launched on the Dubai Gold & Commodities Exchange (DGCX).

The trading platform will be the first in the world to offer an internationally accessible facility for steel, for which the global production market currently stands at 1.2 billion metric tonnes.

The aim is to offer a product which would allow contractors to have price certainty.

Among the benefits for contractors investing in the exchange will be better protection against rebar price fluctuations - which can alter drastically over a 30-day period - as well as better foresight when preparing project budgets.

The exchange is designed to provide traders with tools to manage price volatility: for example, if a customer buys steel on the futures market at a certain price, it acts as an insurance on the physical steel as it will retain the same price until the contract is finished, providing contractors with the opportunity to allocate a definitive amount of money for steel rebar while working on a project.

"The aim is to offer a product which would allow contractors to have price certainty over the period of the contract in which they need the steel," says John Short, executive director, Steel & Base Metals, DGCX.

"So if they take out a futures hedge at the beginning of the contract, they can have a fixed-price for steel for the duration. What contractors currently have is exposure to a market where volatile prices can move against them during the period of a contract, leading to substantial cost overruns. We're not actually changing any prices - we're just offering tools to manage price risk."

The process also helps providers of steel, because they can also sell physical steel, and then insure themselves with a futures contract by buying steel at an agreed price on the futures market.

Contractors and suppliers can trade on the exchange either by signing up as a member or by using an existing broker member and paying them commission.

Trade membership has been set at $10,000 (AED 36,717), while transaction fees have been wavered for the first 12 months of the contract.

"The advantage of using brokers is that you don't have the outlay of a trade membership fee. Secondly, they have a great deal more experience," added Short.
The exchange will operate according to three levels of regulation: self-regulation by the Dubai Multi Commodities Centre (DMCC) and regulation by the Emirates Security and Commodities Authority (ESCA), a government authority that regulates the stock markets and has the power to intervene if needs be. The other form of regulation will involve the standard of rebar bought and sold through the exchange, which will be approved by UK Certification Authority for Reinforcing Steels (UK Cares).

"Everybody who deals with the exchange wants it to be regulated properly," added Short. "Regulatory bodies are a framework, so that when you hand your money over - like you would do in a bank - you want to make sure the bank is still there tomorrow, and it hasn't taken your money and run; the exchange operates in the same way."

The level of entry for producers of steel to the exchange has also been set according to British rebar standards.

"While we're trading a financial instrument, the underlying product is British standard rebar and we have a list of approved producers for that bar. We're not rounding up anyone who claims to produce steel - producers have to have a track record, they have to have a physical liquidity in this market and they have to have a historical reputation," said Short.

The DGCX has held a series of training sessions in the lead up to the contract's launch on 29 October.

The sessions have been run by Vivek Mahajan, head of training department, DGCX.

"Commodity derivatives can be used as alternative investment instruments and can help reduce portfolio risks through diversification," said Mahajan.

"DGCX fully appreciates the need to further educate investors, producers, consumers, merchants and users of commodities on the benefits of effectively using a commodity derivatives exchange."

One of the companies to have registered on the exchange is building materials company, Madar Holding.

"A lot of traders and contractors have been asking for something to stabilise market prices for a longer period of time, which at the moment we can't do because we are restricted by the changes in global steel prices," said the company's CEO, Sameh Hassan.

"When talk of the futures contract first started, we thought it would be a very good opportunity for everybody - you can hedge a little bit against fluctuations in global pricing, and we can offer contractors more stability."

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