Steel pundits divided on the future of futures

Steel industry pundits appeared divided today on the issue of futures trade in the metal and said steel futures still had to cross many hurdles to be a viable business.

Speaking on the sidelines of the Metals 2004 global meet organised here today by the Bengal Chamber of Commerce & Industry (BCCI), J K Tandon, director of Essar Steel, took a positive view and said he hoped futures trade would take off sooner rather than later.

It would be good for the industry if it could get a fix on a 2- year price window.

"There are problems, like acute lack of storage capacity and warehouses given the huge global production of steel, but these are not insurmountable", said Tandon.

"Even if 10-15 per cent of steel produced globally had to be stored in futures warehouses, this would require major storage capacity expansion", he pointed out.

Tandon predicted futures trading would begin with basic products like wire rods and rebars, and then, as it matured and ironed out problems, would move towards billets and slabs, and finally to standardised finished products.

Rod Beddows, director of the London-based firm Hatch, said despite clear indicators that futures trade would benefit both producers and users through more efficient distribution and logistics and better price discovery, the industry appeared to be reluctant to take the plunge.

Several studies had established the benefits that would be delivered through a futures trading system, he added.

Presenting the opposing viewpoint, Vinod Garg, executive director of Ispat Industries, said, "The futures model has been tried and has failed to deliver expected benefits to producers like us as steel is not a basic metal like copper or zinc traded on commodity futures exchanges."

Futures would take off only if the market offered facilities like a 2-3 year liquidity window, pre-financing facilities and 10-year buy-back for downturns as in non-ferrous metals, said P Bhattacharya, joint managing director of Usha Martin Ltd.

It was impossible to create a futures market in products like hot rolled or cold rolled coils or TMT bars as the specifications of customers were too precise for the items to be traded as commodities, he added.

Actual production of aluminium was only a fraction of the volumes traded, but steel production was very large, at more than 800 million tonnes worldwide, Bhattacharya reiterated. This would would enormous demands on the resources required to trade in volumes in multiples of actual production.