The Chicago Climate Futures Exchange has joined with a steel industry analysis company to launch futures on scrap steel, aimed at reducing volatility in the market.

The World Steel Exchange will draw on indices developed by World Steel Dynamics for a line of futures contracts designed to hedge price movements in raw steel, CCFE said in a release Monday.

The venture is a new direction for Climate Exchange PLC (CLE.LN), the parent of the CCFE, which operates emissions markets in Europe and the U.S., but founder and Chairman Richard Sandor said it fits the company's broader mission.

The World Steel Exchange "represents an expansion of our environmental products portfolio, and it offers a unique risk-management tool for the steel industry, scrap dealers and other market participants," Sandor said.

The first contracts are expected to launch later this year, according to officials, and will trade on the CCFE platform.

Peter Marcus, managing partner at World Steel Dynamics, said that the indexes won't be physically settled but rather cash settled against the indexes.

World Steel Dynamics already provides pricing for three of the most widely traded scrap products: heavy melt, shredded and prime industrial.

Marcus said that half the steel industry is driven by scrap while the other half is driven by iron ore and coking coal.

Scrap metal is used in electric arc furnaces to produce long-steel construction products such as billet but it can also be mixed with iron ore and coking coal in different quantities to produce other types of steel through the integrated steel-making process as well.

The Chicago Climate Exchange joins a bevy of other exchanges that have launched steel futures contracts over the past year and a half. The London Metal Exchange launched in February 2008 a futures contract for billet, a semifinished steel construction product. The CME Group Inc. (CME) launched last October a futures contract for hot rolled coil, and the Shanghai Futures Exchange launched this year future contracts for wire rod and debar, two types of finished construction steel products.

Exchanges have launched steel futures contracts in order to help consumers, producers, suppliers and investors to hedge their risk in the volatile steel markets. Steel prices collapsed from their all-time highs in the summer and are now slowly recovering in some regions.

A consultant who has helped exchanges launch new futures contracts, welcomed the scrap futures contract but said there would be several hurdles to overcome.

"It is something that could be useful but the practicality of it may be tough to figure out," he said.

The consultant noted it would be hard to set quality standards on ferrous scrap given that the every scrap yard tends to have a different method for collecting and processing their scrap. Consequentially, arriving at a consensus on price isn't easy. Marcus felt confident that the scrap contract would gain traction. "Our goal is from a year from now to have good liquidity."

He said he was confident that investors would be interested in using the Climate Exchange's futures contracts because they're linked to World Steel Dynamic's indexes, which glean prices from physical suppliers and not financial investors.

"One of the differences between us and the LME (is that) we get our prices only from suppliers" not from the financial investors, Marcus said. "It's a price (system) that is less exposed to being (influenced) by financial" players, he added.

Marcus preferred not to comment on how many parties contribute to the indexes.

The exchange expects to launch other steel-related products in the future, including in theory iron ore futures, Marcus said, although nothing concrete has been planned yet.

-By Jacob Bunge and Alex MacDonald, Dow Jones Newswires; (312) 750-4117; jacob.bunge@dowjones.com