Steel ain't a stock

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Among the comments in this morning's Opening Bell feature was a very reasonable - and all too often overlooked - question about the pricing of steel contracts.
In fact, when you hear about hedge funds losing billions on some big commodities trade, it's usually because the trader is fresh off the treasuries or equities desk, and treats his new job pretty much the same way he did his old one, using abstract theoretical pricing models, while oblivious to the forces of the real world.
As the reader points out, the volume for steel has recently plunged:

LME STEEL-Prices plunge to contract-lows on weak demand

The reason for this is mainly to do with the drying up of credit. As credit dries up, it becomes increasingly difficult to get the funds required to ship steel, or even to store it. The reason there's not a big arbitrage market for steel, as our reader wonders, is because unlike most markets, there is an element of time and logistics involved in the commodities market. The technology that accelerates the deal process when you buy say, a stock, is useless when transporting tons of steel around the globe.
For instance, say you want to take advantage between the price in the Far East ($300 a tonne) and stuff in the Black Sea ($450 per tonne) as our reader supposes. That's a lot harder than you think. First you have to find a ship. To illustrate how hard that is, one of the largest shippers in the world, Dry Ships, has a total fleet of 30! Added to that, you have to find a captain for the ship, and so on.
Moreover, there is the time involved in shipping the steel from place to place. Of course, steel which is in an area of the world with a higher demand relative to availability is going to have a higher price. But it's not something you can just expect to be delivered without any regard for the availability of transport, docks etc. That also affects the price.
It's a good issue to raise, and it's the reason so many people lose tons of money trading commodities. It's also one of the reasons commodities often have a much higher volatility than equities.

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