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Sat 2 Jun 2007 12:00 AM

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Steel contract to balance risk

Contractors will be better protected against rebar price fluctuations with the launch of a steel rebar futures contract on 27 June.

Contractors will be better protected against rebar price fluctuations with the launch of a steel rebar futures contract on 27 June.

The trading platform is being launched on the Dubai Gold & Commodities Exchange (DGCX) and 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 exchange was spurred by steel price volatility, which can alter drastically over a 30-day period.

"If a contractor takes out a futures hedge at the beginning of a contract they can have a fixed-price of steel for the duration of the project," said John Short, executive director - Steel & Base Metals, DGCX.

"What they 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."

Contractors 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 US $10,000 (AED36,717), 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 level of entry for producers of steel to the exchange has 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."

The Middle East is one of the world's fastest growing steel markets, now consuming 50 million metric tonnes per annum (mmtpa), while price volatility can range between 15 and 20%, according to DGCX.

GCC consumption of rebar in 2006 reached 12 million metric tonnes - 5.9% of global rebar consumption - and demand is expected to grow at 9% a year until 2010.

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