Mittal CEO Sees No Future in Steel Futures

The option for physical delivery used in most commodity exchange transactions ensures that the value of the futures contract doesn't stray too far from the value of the physical commodity. When a big-enough difference does occur between the traded price of the future and that of the physical metal, arbitragers seek to profit from price differences between the two.

The Nymex is currently considering introducing a steel contract, but it is still in the research stage at this time. However, based on past practices, it seems likely that it at least will allow the contract to be settled using metal.

Despite steel producer resistance to the futures contract -- Mittal's attitude is widely supported as the cheers to his remarks demonstrated -- the contracts may not just be useful for consumers, but also for producers. "Since the early 1970s, with the founding of [Chicago Board Options Exchange], we have discovered how important markets are in marking markets more efficient," says Robert Bruner, dean of the University of Virginia's Darden School of Business. "We know that suppliers and customers are much better off in the presence of these contracts than without."

The reason is that the risk of changes in prices can be shifted to those who are more able to bear it through the use of such financial market derivatives, he says.

In the fall, it's highly likely that some steel sellers will wish there were a steel futures contract. That's because, although they don't necessarily disagree with Mittal's outlook, analysts say that prices are likely to soften. Ioannis Kallinikos, metals analyst at Metal Bulletin Research, says that current steel market prices are unsustainable.

Like Mittal, however, he says it won't be a crash because producers will moderate their production volumes, but that there still will be a slight weakening as inventory levels in the U.S. look set to climb.

Scott Burns, equity analyst at Morningstar, believs that softness -- added to a general level of market skepticism towards companies in the sector -- will keep shares of producers such as Mittal, U.S. Steel(X) and Nucor(NUE) lower than perhaps is justified by changing market fundamentals.

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