Banks and brokers are betting new London Metal Exchange steel contracts will gain traction in less than the decade it took for aluminium contracts to catch on.

After many years in design, steel billet contracts will start trading on the floor of the LME on April 28 next year.

Big names in the $500 billion steel industry oppose the idea of futures contracts, echoing the position of aluminium firms when the LME brought an aluminium contract to the table.

"The chance of rapid success (for steel) is greater today than it was 20 years ago," said Michael Overlander, CEO and managing director of brokerage Sucden referring to aluminium contracts launched in 1980s.

Today's high grade aluminium contract, now the most heavily-traded on the LME was launched in 1987 but it was more than a decade until it was fully accepted by the aluminium industry, and as a consequence built liquidity.

"To say the introduction of the aluminium contract was viewed as a serious threat to aluminium producers is an understatement," said Michael A Parker, vice-president of Alcoa Materials Management, part of the world's second biggest aluminium producer Alcoa.

Big names in the $500 billion steel industry like Lakshmi Mittal, president and chief executive of Arcelor Mittal, the world's biggest steel producer, have dismissed the idea of a steel futures market.

Bankers disagree.

"We're highly optimistic...There's been significant interest from the producers and the consumers in the industry itself," Fabian Somerville-Cotton, head of listed products at Dresdner Kleinwort said.

"We have every reason to believe it will be a success...The challenge is to attract liquidity," he said.

Bankers and brokers say they have a wide variety of investors enthusiastic about the contracts, ranging from hedge funds to consumers, who wants to use the steel futures both to hedge their risks as well as to speculate.

But several said the performance of one of the LME's recently-launched products, a set of plastics futures contracts, could cast a shadow over steel's debut, causing people to stay hesitant.

"The biggest weakness for the steel contract is probably the plastics contract," Brian Olson, Head of Metals Trading at Barclays Capital said.

In May 2005, the LME introduced the first exchange-traded plastics futures contracts for polypropylene and linear low density polyethylene, with the addition of regional contracts in 2007.

Compared to the Exchange's main contracts, plastics are traded infrequently.

"Because the plastics contract did not go so well, there will be some people doubting the steel contract on that basis alone, so it may have a bit more of more of an uphill road to climb," Olson said.

The Exchange is banking on steel traders, rather than producers, dipping their toes into the market at first.

"Steel merchants create the free trade flows simply by dint of acting as principals, creating and wearing price risk and volatility risk," LME chief executive Martin Abbott said.
 
"Merchants will make or break the launch." Reuters