LONDON, March 14 (Reuters) - The London Metal Exchange will launch a cash-settled steel billet swap, based on the monthly average settlement price of its physically backed steel billet contract, later this year, the exchange said on Wednesday.
“We have done the initial work in terms of discussing it with members in the steel committee and there is a lot of interest,” said the LME business development manager Chris Evans.
“We are now starting discussions with LCH.Clearnet ... It would follow the same pattern as the non-ferrous LME swaps”
The exchange launched in January eight non-ferrous metals swaps contracts, settled against the average of the daily official settlement prices for the month. This kind of contract is an on-exchange contract that can be financially settled, as opposed to requiring physical delivery.
The LME said in December it was considering launching a steel billet swap too.
“I think it’s a good idea. It is a good option for anyone who has looked to use the LME for hedging but has been concerned by the risks that the physical delivery mechanism creates,” a steel trader said.
“Plus, you are able to trade against the monthly average, which can improve your situation from a hedging perspective.”
The LME launched two physically-backed regional billet futures contracts in April 2008, one Mediterranean and one Far East contract, which subsequently merged into the Mediterranean contract in July 2008.
The London-based exchange has said in the past that it is considering the launch of various cash-settled steel contracts, following the example of other exchanges such as the CME , which have seen trading volumes grow in the past few months. (Reporting by Silvia Antonioli and Josephine Mason; editing by xxx)