SteelOrbis Shanghai
According to reliable indications from the
China Iron & Steel Association (CISA), the currently frozen Chinese
steel futures project is expected to be thawed out and resume its approval process. This big change results from the market demand situation and the corresponding change in attitude on the part of the CISA.
In August 2006, the
China steel futures program was halted by the National Development & Reform Commission (NDRC) due to multilateral disagreements, though it had been through a number of years of R&D and had been approved by the
China Securities Regulatory Commission (CSRC). The immaturity of the local markets was given among the NDRC's reasons for stopping the project. However, it was principally the CISA's strong opposition on the issue of
steel futures that led to the project's suspension.
It is evident that the issue of pricing rights was at the core of the CISA's objections to
steel futures. If the futures project successfully goes public, the current steel pricing system will probably change drastically in the future. Namely, pricing rights will be transferred from the major steelmakers to the Futures Exchange, i.e. to the market. The local steel magnates certainly do not want to see this happening. As the representative of the domestic steelmakers, the CISA is of the same viewpoint.
However, both the local steelmakers and the CISA are facing increasing market pressures. Due to the growing gap between supply and demand, market price fluctuations, and unpredictable changes in material costs, the local market calls for an effective risks management system to forewarn of and avoid potential price risks. The current market pricing system is controlled by the suppliers only and this partially accounts for the price disorders in the local market. It's not unknown in recent years for the price of a given steel product to vary by one thousand RMB within a certain time span. In addition, we see that nowadays the market prices are always lower than the ex-factory prices. Both the CISA and the major local steelmakers are blamed for this steelmaker-oriented pricing system and for their ineffective management of the situation.
The
steel futures project would meet the demand from the market, at least partially. As we know, the major functions of
steel futures are hedging and pricing. Once the
steel futures go public successfully, steel market efficiency would be improved accordingly. The futures market can provide a consensus of major opinions regarding future steel prices. In
China, the current electronic pricing system's price determination function is somewhat similar to the futures market. Many traders, end users and even steelmakers favor the estimation of the future price trend according to the prices indicated by this system. While, market players haven't been able to control the risks of the electronic pricing system so far, the use of the system inspires a greater desire for the
steel futures project.
In conclusion, the CISA appears to be slowly changing its attitude toward
steel futures and is moving towards gradual acceptance. It is reasonable to forecast that there is not too long a way to go before
steel futures go public.