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DGCX to launch Steel Rebar Futures Contract on June 27

John Short, executive-director for Steel & Base Metals at DGCX, announced this yesterday as he tackled before investors and the steel community the profitability of hedging in the industry, whose annual global production amounts to 1.2 billion metric tonnes of steel, through the DGCX Steel Rebar Futures Contract.

He said the DGCX futures contract would be the first internationally accessible exchange-traded instrument covering physical steel, an alloy produced after reducing carbon in iron. While India and China have exchanges offering steel futures, he added, the prices are confined to the respective national markets of these two most populous nations in the world, and that trading is limited only to domestic firms.

"Whilst the prices discovered on DGCX are also domestic, they are reflective of rebar pricing throughout the RSAGS (Red Sea Arabian Gulf Shore) countries," Short said, adding that international companies are allowed to trade in DGCX rebar futures contract.

He stressed the importance that Dubai plays in the steel industry, particularly on rebar, a steel product whose price behaves like that of a commodity, saying that the range of prices in the city are being watched by RSAGS countries.

Soft-launch

Short said the DGCX Steel Rebar Futures Contract would have a soft-launch based on monthly contracts for four to six months, and have a subsequent weekly launch of one to 13 weeks.

Short said the Dubai rebar price is important to the Asian and European markets for long steel products because the world's two dominant long product trade flows converge in Dubai. "Therefore, DGCX contract is relevant regionally and internationally for steel price discovery and hedging purposes," he added.

Consumption

DGCX said the Middle East market ate up some 20 per cent of global rebar consumption in 2006. The six member-countries — Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and UAE — of the GCC alone accounted for 12 million metric tonnes per annum (mmtpa), or one-third of the Middle East region's total consumption and 5.8 per cent of global rebar consumption.

It added that the GCC demand was seen to increase by nine per cent a year from 2006 to 2010, as against the annual global growth of some three per cent for the same period.

The Middle East is the only region outside China whose production and consumption of rebar had increased over five per cent. In the past 10 years, steel production in the region has trebled to over 20 mmtpa, two-thirds of which are rebar.

DGCX added, however, that the Middle East still imports an additional 10 mmtpa of rebar and/or upstream billet (long steel products), some three mmtpa of which goes into the UAE. Thus, the region's steel market which is price-correlated to Dubai rebar is seen to reach over 25 mmtpa to 30 mmtpa by end-2010, having a market value of Dh44.1 billion to Dh55.1 billion ($12 billion to $15 billion).

"The Middle East region is one of the world's fastest growing steel markets, now consuming over 50 mmtpa," Short said. "With the introduction of futures in steel, the physical steel supply chain would be in a better position to mitigate the negative impacts of price volatility. That price volatility can be in excess of 15-20 per cent, putting tremendous stress on cash flow management and project profitability."

Risk management

In a statement, Colin Griffith, DGCX chair, stressed that the steel industry has long been in need of price risk management tools, saying that the futures contract would address the matter. "DGCX is not just another exchange; but an institution committed to playing its pioneering role in the domestic and regional market to the advantage of all the market players," he said.

Griffith said the DGCX prices would serve as reference price to the steel trading community because these are circulated right away. "Counter-party risk is mitigated as transactions executed on DGCX are cleared and guaranteed by Dubai Commodities Clearing Corporation (DCCC)," he said.

Short said that without a futures contract to bring both sellers and buyers into a somewhat agreed price in a transparent manner, the region's steel market would have to continue to contend with the price volatility brought about by the supply and demand fundamentals.

He said that with futures contract, the movement of steel prices shouldn't be more than $25 a day, unless there is a major disaster in the region or other important regions. "It's a reasonable amount in a young market," he said. "We also want to protect the participants in the market."

DGCX said: "In the absence of financial tools to help steel industry participants discover a representative, transparent market price and hedge their price risk, firms remain highly vulnerable to the negative impacts of rapid, and all too frequent, unfavourable price movements."