What are Steel Futures?

In January 2003 Steel Derivatives was retained on a full time basis to drive and co-ordinate the LME's steel futures program.

The majority of the steel industry uses forward contracts. These are contracts where the price is agreed today for steel to be delivered at some later time ie delivery 'forward' of today. All the terms and conditions of the contract - the material specifications, documentation, payments, delivery terms etc - are all tailored to the particular contract. Money changes hands at the time of delivery.

Futures contracts are established on the same principle. A price is agreed today for something to be delivered in the future. But, whilst a forwards contract can be tailored to the specifics of the deal in question, a futures contract is standardized. Same volume, same specification, same documentation, same payments, same delivery terms. The only things in a futures contracts that are non-standardized are:

• The price
• The delivery period

Otherwise Futures contracts are identical to the forwards contracts that the steel industry uses everyday.

There are two important attributes that standardization brings:

• First, if you standardize contracts, they can be exchange traded. This applies to steel, sugar, oil, foreign exchange, government bonds or shares in a company. Provided the contracts are standardized, they can be exchange traded.
• Second, and closely linked to the principle of exchange trading, is the practice of closing out. Essentially if you sell something in an exchange, then buy the same thing back, you cancel out any obligations incurred when selling. Similarly, if you buy something, then sell the exact same thing back to the market, you cancel out any obligations incurred when buying.

The purpose of Steel Futures is to help manage price risks. They are a tool in your risk management tool box.