The Dubai Gold and Commodities Exchange (DGCX), the first international commodities derivatives exchange in the Middle East, today said that its proposed steel futures contract will enable the industry to mitigate the negative impact of steel price volatility in the UAE and the region.
Details of the DGCX Steel Rebar Futures Contract were unveiled to investors and the steel community at a seminar organized by DGCX in Dubai today. Slated for launch this summer, the Rebar Futures will be the world’s first internationally accessible exchange-traded instrument that provides coverage of physical steel. Globally steel is a 1.2 billion metric tonne physical marketplace.
Commenting on the contract, Colin Griffith, Chairman, DGCX, said, “The need for price risk management tools in the steel industry here has been felt for long. The launch of the contract, whose specifications will be tailored to the needs of the industry, will address that concern adequately. DGCX is not just another exchange; but an institution committed to playing its pioneering role in the domestic and regional market to the advantage of all the market players.”
“The fact that DGCX futures prices are instantaneously disseminated will serve as a ready reference price to the steel trading community. Counterparty risk is mitigated as transactions executed on DGCX are cleared and guaranteed by Dubai Commodities Clearing Corporation (DCCC),” he added.
Steel Rebar Futures is first of a suite of four futures contracts targeted to the steel supply chain, and will focus on the regional steel market place. John Short, Executive Director, Steel & Base Metals, DGCX, explained, “The Middle East region is one of the world’s fastest growing steel markets, now consuming over 50 million metric tonnes per annum (mmtpa). 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. That price volatility can be in excess of 15-20%, putting tremendous stress on cash flow management and project profitability.”
Continued Short, “More than 3 mmtpa of the benchmark product for the contract, BS4449 (1997) W460B Type 2 Rebar, is traded and consumed each year in the UAE. A further 20 mmtpa of price correlated steels are traded in the Red Sea Arabian Gulf Shore (RSAGS) countries, ensuring the DGCX product is of key material value to the regional steel market, not just Dubai.”
As daily market sentiment continues to play havoc with steel demand and supply fundamentals, price volatility has increased. In the absence of financial tools to help steel industry participants discover a representative, transparent market price and hedge their price risk, firms remain highly vulnerable to the negative impacts of rapid, and all too frequent, unfavourable price movements.
GCC consumption of rebar during 2006 was a whopping 12 million metric tonnes - 5.8% of global rebar consumption – and GCC demand for rebar is predicted to grow at the rate of around 9% per annum during 2005 to 2010 as against global growth of around 3% for the same period.
Besides, trade and industry hedgers will be able to take advantage of the futures even if their specific steel product is something different from DGCX specification rebar, or their business conducted in another regional jurisdiction. In the physical market, prices for different rebar grades, diameters, and even different steel products, like billet, wire rod, and merchant bar, can be quoted at a premium or discount to the Dubai rebar price.
Although India and China have exchanges offering steel futures, the prices discovered in them are confined to the respective national markets and only domestic firms are allowed to trade. Whilst the prices discovered on DGCX are also domestic, they are reflective of rebar pricing throughout the RSAGS countries.
Unlike India and China, DGCX is open to all international companies to trade. On top of all, Dubai rebar price is of key relevance to EurAsian long product steel market because the world’s two dominant long product trade flows clash in Dubai. Therefore, DGCX contract is relevant regionally and internationally for steel price discovery and hedging purposes.
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