BMW and Volvo eye LME steel contracts
European carmakers BMW and Volvo plan to experiment with steel contracts to be launched by the London Metal Exchange (LME) early in 2019, a move that may eventually change the way the industry hedges and prices contracts, say industry sources.
The LME is launching three hot rolled coil (HRC) steel futures covering Europe, North America and China early in 2019. Sources said carmakers such as Volvo and BMW were interested in using them.
HRC is a flat steel used to make cars and white goods and is typically bought by consumers on annual fixed-price contracts. The bourse’s cashsettled contract will be settled against an industry benchmark.
“During the first six months, merchants and traders will put volumes in to get liquidity going,” a broking source said.
“If that works, manufacturing companies including BMW and Volvo will ask suppliers to make offers on the basis of LME prices for new, small contracts, to see how it works.”
One source said BMW already used iron-ore derivatives as a proxy for hedging some of its steel costs, so could move with relative ease to trading the new LME contracts.
BMW said it was pursuing a “hedging strategy” and aimed to “increase planning reliability for the company”.
Volvo said: “We continuously review our raw material strategies. However, no decisions have been taken on hedging.”
Carmakers, alongside construction groups, banks, brokers, merchants and steel service centres, have traditionally been open to steel futures. Steelmakers have mostly been opposed, concerned about potential loss of pricing power.
Industry sources said carmaker interest boded well for the contracts, but they also stressed that new contracts usually took years to gain traction, adding that a lack of interest from steelmakers could slow the process.
“From what I’ve seen, first merchants get involved, then prop traders, then service centres or stockists. Eventually, mills start offering steel on an index [linked price],” said a source at an LME brokerage.
The LME already has contracts for steel scrap and for steel rebar, a type of construction steel. Volumes have been growing modestly since the contracts ’ 2015 launch.
About 4.2-million tons of scrap and 500,000 tons of rebar have been traded on the LME in the year to date, compared with 3-million tons of scrap and 644,000 tons of rebar traded in full-year 2017, Refinitiv Eikon figures show.
The LME, the world’s oldest and largest metals marketplace, is owned by Hong Kong Exchanges and Clearing. Having lost some market share in recent years to the CME Group and Chinese Shanghai Futures Exchange, it is aiming to make inroads into steel, an industry worth $900bn a year.