Euro Pricing May Delay European LME Steel Contract Until 2020

According to industry sources, the London Metal Exchange's plans to launch a European steel contract will be delayed until next year because the industry wants the price to be in euros, which the exchange's clearing house cannot handle.

The LME launched a number of cash-settled futures contracts this week, including hot rolled steel coils, widely used in the engineering and automotive industries, for North America and China.

The LME exchange had to postpone its launch because Europe values ​​steel in euros.

A steel industry source said that large companies using steel derivatives "have spoken out on the euro-denominated contract since the day the LME announced plans to review it."

“As a global marketplace, the LME is primarily designed with the dollar as the primary currency for trading and clearing all contracts,” the LME said in response to a request for comment.

Trading sources say it is not difficult to switch the contract specification to the euro, and that the problem lies with the LME Clear, which can only handle dollar-based clearing contracts.

“They did not give us an exact timeline for when the European steel contract could be revived. It won't be this year, the LME Clear transformation will be costly and may take until next year, ”said a steel trader.

LME Clear will require a major overhaul to clear the euro contracts, which will require significant investment and time, sources said.

"If the LME does not have the resources, the European contract may have to be abandoned, unless the industry agrees to try working with the dollar bill," said another source in the metals industry.

“The European steel contract became noticeable due to its absence, there was a decent interest in it. We considered this as a possible hedging instrument. For us, a dollar contract would create a currency risk. "

The risk is associated with fluctuations in the exchange rate of the dollar against the euro, since many companies may not have access to funds to hedge against adverse fluctuations in foreign exchange rates.

“New contracts take a long time to build momentum,” said another trader.

LME already has steel rebar, structural steel and scrap steel contracts, which have achieved modest success since their launch in 2015 and have generated revenues for the exchange following the failure of the steel billet contract.