With futures trading promising to illuminate
the shadowy world of steel price negotiations, consumers
generally are supportive of the move to greater
That's not to say they're rushing to the ring
to participate. There is some nervousness that the contracts
could backfire and spark even greater volatility and price
rallies. But even from the sidelines, many consumers see merit
in steel futures.
"Ultimately it should help the market
function better because anything that increases transparency
and allows for hedging tends to lead to better market
performance," said Bernard Markstein, senior economist and
director of forecasting at the Washington-based National
Association of Home Builders. "It is true in some situations
you can introduce speculation that can lead to more volatility.
But in most cases the introduction of futures markets, which
allow for hedging, reduces volatility and overall improves the
market, which is actually to the benefit of both the producer
and the buyer."
Markstein concedes that the new contracts
might be "a little rocky at first," given that volumes could be
thin and there might be a lack of knowledge about how to use
them. "But over time, it fills a need and you will see some
deepening of the market and in overall functioning," he said.
"I just don't see how it could be anything but a good thing for
Auto companies, a major end-user of steel
products, appear encouraged by the start of steel futures
"Steel is a significant commodity exposure
for automakers, and hedging offers the industry an important
new tool for managing price risk. However, risk management
tools like derivatives for hedging are, for the most part, not
available," said a spokesman for Dearborn, Mich.-based Ford
Motor Co. "This is a positive step toward a more liquid market
for steel derivatives."
Executives from Chrysler LLC, Auburn Hills,
Mich., refused to comment, but General Motors Corp., Detroit,
is leaving the door open. "We're exploring hedging and various
other strategic alternatives to reduce costs over the long
term," a spokeswoman for GM's purchasing department said.
"We're aware of it, but we've not taken a position on it."
Executives from agricultural and construction
equipment makers, also important end-users of steel, are
watching with interest but might not be ready to commit to
using futures until trading volumes are sizeable. "If there
becomes a viable market for this kind of instrument, then we
would certainly evaluate its potential," a spokesman for
agricultural and equipment maker Case New Holland Inc., Racine,
Energy pipeline builders also might need
further convincing. One of the largest pipeline companies,
ConocoPhillips, Houston, said it has no current plans to get
involved in steel futures. "We are not involved in, nor do we
actively monitor, steel futures contracts," a spokesman said.
"Instead, we work and contract with fabricators such as the
OCTG (oil country tubular goods) market and discuss changes in
their realized raw material costs."
That hesitancy to embrace change also is
being felt among those in the service center sector. Many are
uncomfortable with the concept of steel futures and it will
take some time for derivatives to catch on, according to the
Metals Service Center Institute (MSCI), Rolling Meadows,
"Their view is every time they look at it, it
seems to them that the pricing in the futures markets is not
representative of what they think the pricing is in the real
world," an MSCI spokesman said. "And they think that part of
the reason is the required platoon of speculators that has to
get in there to take the opposite sides of one of these
contracts. That becomes another influence that has nothing to
do with the real world."
But "that doesn't mean they won't use it," he