CME Seeks New Growth Opportunities - Analyst Blog

By Zacks | June 22, 2012 AAA

In an effort to extend the services of ferrous derivatives contracts, CME Group Inc. (CME) plans to launch a U.S. steel scrap contract in autumn, Reuters reported this Wednesday. Also, the Chicago exchange plans to capitalize on the increasing interest in price risk management in this emerging sector. The contracts are scheduled to be settled against the AMM Index, in cash terms. This will be the second scrap contract and the 13th steel and steel raw material contract for the company. Many financial institutions have shown interest in the contract, noteworthy among them being J. P. Morgan, a division of JPMorgan Chase & Co. (JPM).

Scrap recyclers, small mills and construction companies that purchase long steel products for manufacturing can explore hedging opportunities from CME Group's expansion. Also, the recent fall in interest in the four-year old steel physically-backed billet futures, an offering of the London Metal Exchange, can prove advantageous for the company.

The news comes on the heels of the company's continuous efforts to launch ferrous contracts in China, which is a promising market for steel products owing to its rapidly increasing investor base. CME Group is striving to tap the opportunities available in the emerging markets of Asia. It is working closely with MySteel, which is assisting the company in accumulating pricing data which will be used for an expected contract.

In spite of the efforts initiated by CME Group to improve its position amidst the ongoing weakness in the derivative markets, the widening of spreads continues to hamper both its top line and earnings. The near-term outlook looks grim and may continue to dampen the company's operating leverage until the derivative markets gain traction.

CME Group currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. We are also maintaining our long-term Underperform recommendation on the shares.

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