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Tue 30 Oct 2007 10:30 AM

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Steel futures contract launches with a whimper

Dubai's international contract receives muted response from traders upon debut.

Dubai's international rebar futures contract received a muted response in its debut on Monday, but traders and industry experts said it would take time for the contract to gain momentum.

The Dubai Gold and Commodities Exchange (DGCX) hopes its contract will allow manufacturers and customers to lock in prices in the $500 billion steel market, which lacks a transparent global benchmark for setting prices or hedging risk.

"It's an innovative hedging tool for the steel industry," said Benedict Floyd, Executive Director of Dubai Professional Trading Group, the Middle East's first trading arcade.

"When you launch the world's first steel contract it takes time to get working, and I would not look at it the first day of trading."

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

DGCX plans to issue three other contracts for stainless steel, flat products and freight by the end of 2009.

"Structured hedging strategies for different segments of the industry can be worked out in synergy with the physical traders. Efficient participation by the industry can turn this steel futures contract a highly successful one," said Pradeep Unni, assistant vice president of Vision Commodities Services at DMCC.

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

The New York Mercantile Exchange, the world's largest physical commodities exchange plans to launch a steel futures contract this year and the London Metal Exchange - through which most of the world's industrial metals are traded - aims to start trading two steel futures contracts on April 28.

Cold shoulder

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

Lakshmi Mittal, Chief Executive of Arcelor Mittal, the world's biggest steel producer, has dismissed the idea of a steel futures market as a way of controlling price volatility.

John Short, DGCX Director of Steel and Base Metals, voiced confidence in the contract's success.

"Once the first few deliveries have occurred and the weekly contracts have had time to mature, then that's when we can look to see the contract picking up momentum - the second half of 2008," he told Reuters.

"Steel is simply too 'new' for even seasoned derivatives traders to pile in, and even more so for the steel community itself," Short added.

The initial batch of eight approved producers for the contract includes the largest Gulf Arab steel producer, Saudi Basic Industries (Sabic), Emirates Steel Industries and Qatar Steel.

"It will remain to be seen that the interest stays or if its just hype at the start," said Clive Murray, Chief Executive of London Commodity Brokers. - Reuters

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