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The winds of change are blowing in the global steel market, as heightened volatility and macroeconomic factors increasingly affect the supply chain. Nowhere is this change more clear than in the growing importance of futures — which many carbon steelmakers have viewed with suspicion for many years.

The question is: to what extent do futures markets actually impact the physical?

In March-April this year there was an explosion in Chinese steel pricing, which had gigantic ripple effects on the global supply chain. The more stellar first-half results of European steelmakers can, in part, be attributed to that huge run-up — rocketing Chinese domestic prices made its export offers much more expensive, giving mills in Europe a more captive market and the ability to export into wider geographies than just a few weeks/months previously.

At the start of this rise, on March 7, the price of square billet in Tangshan ballooned from Yuan 1,780/mt to Yuan 2,130/mt (an increase of around $55/mt at today’s foreign exchange rate). Many attributed the shock move to climbing futures prices — on the same day, the third forward month rebar contract on the Shanghai Futures Exchange firmed from Yuan 1,987/mt to Yuan 2,073/mt (that’s less than $15/mt as of August 1’s forex).

The SHFE rebar contract is often deemed a speculator’s haven; a place for day-traders and punters with no physical exposure to gamble hot money — a viewpoint that has been cemented since the frenzy that engulfed Shanghai equities last year, after which Beijing intervened to stabilize the market and bundles of investors fled in search of better alpha.

However, there’s a correlation between SHFE and the physical market, at 91% since the start ...