30 September 2007

Dubai: The steel rebar futures trading, which the Dubai Gold and Commodities Exchange (DGCX) will launch on October 29, is expected to serve as an effective hedge against price volatility, many industry participants say.

"The futures trading in steel is very new to our region. From what we understand it will be useful to those who have relatively longer term exposure to the market such as big contractors and end-users. We are not very sure about its usefulness to traders because they in any case build their margins into their bid and offer prices in the physical market," said M.Y. Habibullah, general manager of Star Steel International.

Prices of steel - a key metal used extensively in the region's core sectors - have seen extreme volatility in recent months, fuelled by fluctuations in demand and supply, sentiment, freight rates and rising costs of raw material.

The high volatility in steel prices is unusual. Its severity is evident in shorter price cycles, which have fallen from five to seven years in the 70s and 80s to two to three years in the 90s, further shrinking to a mere four to five months in recent months.

"The Middle East region is one of the world's fastest growing steel markets. 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. The price volatility can be in excess of 15-20 per cent, putting tremendous stress on cash flow management and project profitability," said John Short, executive-director for Steel and Base Metals at DGCX.

Rebar finds significant usage in real estate, construction and other key industries in the Middle East. Rebar constitutes 80 per cent of all steel used in the UAE.

The Dubai rebar contract is expected to become relevant to all participants in the market due to its high correlation to the East Africa, Red Sea and Arabian Gulf Shore (Earsags) rebar market.

Demand for steel rebar has been high - both within the region and outside - due in part to major construction projects and higher government spending on infrastructure projects.

Many industry representatives said the Dubai rebar contracts would serve as a formal price discovery mechanism for the whole region. "Forward transactions will help the industry to take positions against any perceived change in supply or prices," said R. Mahalingam, financial controller of Dubai-based Alam Steel Industries.

As DGCX offers a delivery-based contract, steel industry participants believe that the futures trading will also serve as a hedge against supply constraints.

However, many said the efficacy of the contract in mitigating risks related to volatility and supply will depend a great deal on the acceptance and participation from the industry.

A few physical steel traders in the market expressed fears that futures trading will allow speculators who have nothing to do with the market to influence the price.

But many established players said Dubai futures prices will be significant to all market participants right along the Black Sea to Asia and China to Mediterranean region.

Volatility: Rebar prices see major movements this year

This year, prices for steel rebar rose from $600 a tonne in March landed price at Jebel Ali to $655 a tonne in May. Prices fell since then, touching $575-585 a tonne in the last week of July, before climbing back to $620-625 a tonne in early August.

Prices of correlated steel billet, wire and rod have suffered similarly, if not such extreme movements.

By Babu Das Augustine

Gulf News 2007. All rights reserved.