The Singapore Exchange (SGX) plans to launch steel futures and swap contracts early next year, hoping to cash in on rising demand for the alloy in South-east Asia.
The SGX is trying to open up the Asian steel derivatives market by taking on rebar futures in Shanghai, which are the world's most liquid steel futures but not open to foreign investors unless they are registered locally.
The SGX contracts would add more steel derivatives to a largely illiquid global suite outside China, and their success would depend on whether traders from the world's biggest steel consumer and producer use them or not.
Outside China, one of the most- traded steel contracts is the CME Group's US Midwest hot-rolled coil futures. Launched in 2008, its volume reached only 55,714 contracts between January and October, according to the CME website. Volume on the most-active rebar contract on the Shanghai Futures Exchange topped 300 million lots last year, based on Reuters data.
"The real test will be if the Chinese guys get involved," said a broker in Singapore, adding that he expected banks and trading houses using the CME product to be drawn to the SGX contracts. The China rebar contract is used as a proxy for hedging all steel exposure in the mainland, and the SGX effort is aimed at rivalling that, the broker added.
The SGX, which clears about 90 per cent of the world's iron ore swaps, plans to launch its hot-rolled coil steel futures and swaps for South-east Asia in the first quarter of next year, pending regulatory approval.
"These products will address the need for price risk management in response to the rising seaborne steel trades flowing from North Asia to ASEAN," the SGX said in response to a query.
Steel imports from China into South-east Asia hit 11 million tonnes last year, accounting for 24 per cent of the region's total imports, according to the South East Asia Iron and Steel Institute.
"We've been asking for the product; we're very interested in it. We think it will have a similar profile to the iron ore swaps market in terms of how that developed," said a London-based physical steel trader.
China, Japan and South Korea are the three major suppliers of steel products to ASEAN, a region which is not self-sufficient in supply, particularly for semi-finished and flat steel products such as hot-rolled coil used for pipes, ships and cars.
"The market wanted an index price that reflected exports out of China or within the ASEAN region. Our clients all wanted to start trading an Asian contract, and we think this one will reflect that," said an iron ore broker.
The SGX handled more than 211 million tonnes worth of iron ore swaps from January to last month, still just a fraction of the estimated 1.2 billion tonnes of seaborne iron ore that are traded globally each year.
But the exchange's iron ore swaps are currently facing competition from China's newly launched Dalian iron ore futures, where volumes in the first month of trade were nearly seven times those on the SGX.