Most traders fail to hedge risk using steel

 

(XAVIER WILSON)   

 
A majority of contractors and traders failed to hedge their risks by using steel rebar futures contracts to lock in their buying price at Dh2,500 a tonne for a period of 18 months, as against the current price of Dh4,000, a senior executive at the Dubai Gold and Commodities Exchange – or DGCX – has said.

“Only a small number of people have used the futures to hedge their risks. Most of the contractors are now crying, as steel prices have shot up,” John Short, Executive Director, Steel and Base Metals, Dubai Multi Commodities Centre (DMCC), told Emirates Business.

DGCX has traded about 4,900 contracts, equivalent to 49,000 metric tonnes of rebar, since October 29 when the contract was introduced.

“East Africa, Red Sea and Arabian Gulf rebar market is well correlated to the Dubai rebar price. So far we have been 98.92 per cent correct in terms of price correlation. And that is a key element of our success,” Short said.

Dubai rebar price assumes a high significance as trade flows from the Black Sea across Asia to China and down to the Mediterranean, with Dubai being the strategic point where these two trade flows converge.

Globally, steel is a 1.2 billion-tonne industry, with some 400 million tonnes traded each year. The steel industry in the Middle East has witnessed significant growth in recent years, and about 50 million tonnes of the metal is now traded and consumed in the region annually, according to the DGCX website.

Driven by the region’s infrastructure projects, the GCC’s per capita steel consumption is 380kg, among the highest in the world. Dubai consumes more than 500kg per capita, against the global average of 182kg.

A substantial amount of time is being devoted by DMCC officials to educate senior executives of contracting companies about the various benefits of steel rebar futures contracts. “Many of the people still don’t understand the benefits of hedging. We have been holding conferences and educating people on steel futures,” Short said.

Contractors recently told Emirates Business that they were looking to use the steel rebar futures contract. “As contractors, we will certainly be hedging against soaring steel prices by using the DGCX platform,” Abid Junaid, Executive Director of Ascon, a division of ETA Ascon Group, said.

According to industry experts, most of the steel demand in the country is met by imports from Turkey. Rebar finds significant usage in real estate, construction and other key industries, and constitutes 80 per cent of all steel used in the Gulf, especially in the UAE.

Between 80 and 85 per cent of the rebar is made from scrap and the rest from iron-ore and coke. The rise in steel prices reflects the steep increase in the cost of inputs such as coke, iron-ore, scrap and energy. Other factors pushing up prices include a weak dollar, rising cost of ocean freight, and higher natural gas prices.

Turkey’s Izmir Demir Celik Sanayi, Ekinciler Iron and Steelworks, and Diler Iron and Steel; Al Tuwairqi Group (Al Ittefaq Steel Products); Saudi Arabia’s Sabic Steel (Hadeed); Qatar Steel Company; and the UAE’s Emirates Iron and Steel are among the approved DGCX producers.

 

 

Trading futures

 

There are two ways to hedge futures. First on-exchange trading and exchange of futures for physical arrangements.


There is not yet a sufficiently long forward curve for on-exchange trading nor there is enough daily liquidity to support on-exchange trading for large volumes.

EFP arrangements are negotiated off-exchange then posted on-exchange in the form of block trades. They can be offered forward 12-18 months.
 
 
 
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