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There is no evidence to suggest that futures contracts have any effect on price volatility, in fact this is not their purpose. Without volatility and price risk you would not need a futures contract. What they do is to provide effective and reliable tools with which to manage volatility.
The reasons that the steel industry is subjected to volatility are similar to those in other industrial metals market. However, they may be more pronounced in the steel industry due to the fact that many producers are unable to establish fixed prices for their purchase of raw-material well ahead of time. This situation is contrary to many companies in the non-ferrous industry which often have access to their own ore in the ground. The steel producer’s problem is combined with the difficulty for the majority of steel consumers to switch to other substitutes, as well as the lack of risk management tools to reduce price risk. Thus, volatility remains high in buoyant times.
The introduction of a futures market introduces the potential of funds and speculators to invest in the industry; their involvement does not increase fundamental volatility and may dampen cycles by taking the opposite side to industrial clients.
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