(Yicai) Oct. 23 -- The price of the Shanghai Futures Exchange's hot-rolled coil futures has gradually become an important reference for regions importing Chinese steel plates, including Asia-Pacific, the Middle East, North Africa, and South America, the president of the exchange said in the days leading up to the London Metal Exchange listing a steel hot-rolled coil contract using Shanghai futures prices.

Lu Dongsheng made the remarks during a pre-listing seminar held during LME Week, with John Short, chief executive of Boomer Commodities, a steel derivatives advisory and trading firm, adding that the SHFE prices heavily influence cost-and-freight prices in these regions.

The LME Steel Hot Rolled Coil Shanghai contract will launch on Oct. 27 with a settlement price benchmarked on the SHFE's HRC futures, enabling global investors to directly reference and adopt Chinese steel prices for trading, hedging, and price discovery. The SHFE previously allowed the NOREXECO in Norway to list pulp futures and the Osaka Exchange to launch natural rubber futures using its prices.

Over the past few years, Chinese exporters have been able to hedge with SHFE futures in addition to transacting in the physical market, while they had only the spot market available, global trading houses and fund managers said at the event. The new contract fills precisely that gap, they pointed out.

For example, Chinese export traders can both hedge risk with SHFE contracts and use the market to enhance profits. In addition, global counterparts have had essentially no access to the Shanghai price except through large banks and financial institutions, with smaller and mid-sized traders having to go over-the-counter, which carried counterparty risk and came at a higher cost.

Another backdrop to the LME's use of the Shanghai price is that the global steel market is splintering into blocs.

Aline Carnizelo, chief investment officer of commodity fund Frontier Commodities, cited HRC futures prices in the United States at about USD1,450 per ton, in Europe at USD820 to USD840 per ton, and in China at around USD440 per ton, calling the about USD1,000 gap between the US and China "unprecedented in history." Europe has cut its steel import quotas by 47 percent, while tariffs, stacked on top, have further stretched the Europe–China price differential, she pointed out.

Tariffs, carbon emissions standards, and local cost differences are carving the global market into regional blocks, Carnizelo noted, adding that to gain trading exposure to a particular region, one needs a contract that reflects that region's supply and demand dynamics, so trading a single global contract is no longer sufficient.

The new LME Steel HRC Shanghai contract is denominated in US dollars and cash-settled, with a lot size of 10 tons, the exchange noted. The last trading day is the 15th of each month, which will be moved forward if it falls on a holiday.

The settlement price is based on the daily settlement price of the next calendar month contract of the SHFE's HRC futures, with currency conversion handled by LME's sister company Commodity Pricing and Analysis, and participants need not take physical delivery. Market makers' quoting obligations are concentrated on the contract months corresponding to the most active SHFE contracts.

The SHFE's HRC futures have become the world's largest for plate steel by trading volume, averaging about 700,000 lots a day and 1.9 million lots in open interest. The exchange has 20 delivery warehouses and 22 deliverable brands, covering more than 60 percent of China's HRC output.

Editor: Martin Kadiev