“Steel people are against it. We don’t need this in the steel industry!” exclaimed one of the attendees of our workshop.

“Come on, you are trying to make a s__t load of money off us. Go on and tell us the truth!” said another, who wasn’t quite as polite. I was completely surprised at the verbal exchange that developed during the steel futures segment of our steel trading workshop in San Diego. The presenter, Paul Shellman of Nymex, an intelligent, straightforward guy, was open to establish a floor discussion, but no one, including myself, anticipated such a rough exchange, except, perhaps, Paul himself.

So what is it about steel futures that turns usually polite and tame steel people into an angry mob? What is it about steel futures that makes their blood boil?

There are a couple of simple answers. First, the concept is new, and most steel people (including myself) don’t understand it completely. When we don’t understand something, it is easier to dismiss the whole idea. Yes, there are many questions to sort out. Steel has many shapes and qualities, and steel also has other problems such as the potential for claims and trade legislation issues. Many steel professionals don’t understand how steel futures will be able to overcome these hurdles.

We also wonder whether our steel jobs will be on the line if futures take a foothold. Would sales and purchasing people still be needed to determine the price of steel if price transparency became the reality? Would you still need to have an educated purchasing manager if you could hedge your price up to three years in advance?

There has also long been distrust between the steel industry and the financial world. This distrust has never been felt more acutely than it is now, as other commodities like oil are in the spotlight, and speculators are being blamed for the high prices.

I believe, however, that the biggest reason for steel futures’ negative reputation is the steelmakers themselves. Mittal and DiMicco, deity-like figures in the steel industry, are very openly and sometimes aggressively against them. DiMicco went as far as to say in a recent steel conference that the company is against steel futures because they “promote and breed unethical, if not illegal, activity.”

After many decades of struggling to survive, steelmakers around the world have found their mojo again. Consolidation coupled with improved world demand has clearly put them in the driver's seat, and now they are enjoying healthy profits, price discipline and, most importantly, the respect of the entire steel industry, both upstream and downstream. So naturally, it makes a huge impact when role models like Mittal and DiMicco speak ill of steel futures.

Make no mistake, though: steelmakers are against steel futures not because they are bad for the entire steel industry, but because they believe they are not good for the steelmakers. Steelmakers have recently gained the upper hand in pricing and would like to continue to dictate the price to their customers. With an established futures price, though, producers would immediately lose their newfound pricing power, and, instead, the combination of buyers and sellers in the exchange will determine the price, perhaps against the steelmakers’ expectations. Steelmakers use futures themselves, however, when it is convenient for them – steel producers utilize futures to hedge their purchases and energy needs on a regular basis.

I have my own doubts as to how well the market would establish the steel price once so many non-steel investors start pouring money into the system. Would imperfections in the information flow be magnified, ultimately distorting the price? As I was trying to sort out my doubts on this subject, perhaps the best counterargument came from a rebar fabricator at our workshop. He asked, “How can you quote on a job for a skyscraper in Chicago if you have no idea about what your steel cost is going to be in six months? Even if we cannot use it, we are excited about [steel futures].”

The steel consuming industry clearly needs price predictability well beyond the traditional three months in order to manage their financial risk. Therefore, there will be plenty of steel companies that could use futures contracts and benefit from them. So why deny them the chance to try?