Although exchange officials are keen to launch steel futures on the Shanghai bourse, industry experts and commodity brokers are not too sure about the widespread participation of industry players.

Steel dealers, who made significant losses due to the price meltdown in the spot market last year, are unlikely to have the spare cash necessary to play the futures market.

"We do not have the money to trade in steel futures now. Also, we are not familiar with the rules, so it is better to wait and watch," said Wang Bin, a steel dealer from Tianjin.

Last month, the China Securities Regulatory Commission permitted the Shanghai Futures Exchange to launch futures contracts for two steel products, steel wire and twisted steel.

Beijing Zhihengda Investment Group Co, a leading steel dealer, said it would consider the futures market only after sorting out problems related to the spot price collapse.

The prices of steel wire and twisted steel declined by about 45 percent during the August-November period.

Before the global credit crisis, it was common for steel traders to build up huge inventories with borrowed funds in anticipation of further price increases. But after the crisis hit home, they were stuck with huge unsold inventories and high debts as demand collapsed.

The value of their stocks sharply eroded. Sluggish demand also made large-scale unloading of inventory difficult.

Steel futures contracts would help manufacturers hedge their risks and set prices that more accurately reflect market supply and demand. But steel producers said the contracts were limited in range and, therefore, may not be useful for effective price setting.

Baosteel Group, China's top steel maker, said it was mainly engaged in producing middle- and high-end thin steel sheets and steel tubes, which are not included in the trading categories. However, it said it would "keep a close watch on the progress of steel futures".

Pan Haisheng, assistant to the president of the Guangzhou-based Joint Futures Co Ltd, said: "So far, the investors for steel futures have not been very active. Many are in 'wait and watch' mode. But the futures brokers are quite active in luring customers and the competition among them could be fierce in the near future."

These futures brokers would benefit from steel futures trading, as more investor accounts would be opened and their commissions would increase.

China had launched steel futures in six bourses from 1993 to 1995. But regulators halted futures trading in 2005 citing poor administrative oversight and over-speculation.

(China Daily March 4, 2009)