OpenMarkets

Today’s Number: Falling Steel Prices

May 18, 2012 || Martin Evans || No Comments

Weak steel demand in Europe and slowing growth in Asia has sent global steel prices plummeting recently. With fewer buyers, the trend is expected to continue over the next three months,  as stocks at steel mills continue to rise, and order turnaround for steel quickens.  The slowdown follows a trend of artificially high U.S. steel prices early this year, which resulted in overproduction by manufacturers.

As a result, steel manufacturers are looking to hedge against falling prices, and our U.S. Midwest Hot-Rolled Coil (HRC) steel contract continues to gain interest.  Volumes this month continue to show a positive trend that users are using CME Group to manage their risk with more than 3,000 contracts traded so far in May. But the key number to watch in futures products and whether there is widespread market acceptance is open interest, and open interest in our HRC contract has also risen above 14,000 this month. You can see the chart showing how open interest continues to grow.

The activity is taking place in a still-evolving futures market for steel. Rapid economic growth and structural changes in Brazil, Russia, India, and especially China, have upended the ferrous metals industry in recent years. Steel raw materials and related products like ferrous scrap that were once traded domestically or north-to-south are now traded globally. To counter what has become an unpredictable spot market, the industry has naturally looked for products that offer transparency, mitigation of price risk, and liquidity.