Iron ore swaps trade rises to record in July

* Some physical players resist derivatives market

* Swaps volumes less than a tenth of physical trade

* Quick growth will continue-analyst

By Silvia Antonioli

LONDON, July 31 (Reuters) - Iron ore swaps trading volumes rose to a record-high in July as a steep physical price move prompted market participants to adjust their positions or take new ones to manage their price exposure or bet on their market's views, brokers said.

The Singapore Exchange, by far the largest forum for iron ore swaps, cleared almost 10 million tonnes in July, or about 25 percent more than in May, when the previous record was set, according to preliminary data supplied by iron ore index provider the Steel Index.

The growth in July was due to new participants entering the market and to existing players trading higher volumes than usual, brokers said.

Trading started to increase after the physical price, which had been in the $130-150 range for the last eight months, broke below a key support level, they added.

"Once the index got through $130, people started to make some decisions about their forward positions, as that was a key support level," said John Wright, head of the GFI iron ore and steel brokerage desk.

"When you get big movements people have to adjust their positions with spreads, they have to get in their positions, get out of their positions; it certainly boosts volumes."

International physical spot prices .IO62-CNI=SI have fallen by about 15 percent in the last 3 weeks to hit $115.2 a tonne on Wednesday, their lowest in over 2 and a half years, before recovering a little on Thursday.

SMALL BUT GROWING

The iron ore swaps market is still relatively young: it started in 2008 and got a boost by the move of physical pricing to shorter mechanism 2 years ago.

Many financial and some industrial participants willing to gain exposure to a main Chinese import or hedge their physical positions, have since entered this market attracted by the rapid growth rate.

As existing players gain confidence they start to increase their trading volumes while new comers also start dipping their toes and this should support the rapid growth rate seen in recent years, brokers said.

"I think we will see the volume increase stay; commodity volatility has increased across the board and traders want exposure to commodities that have a China component," said Clive Murray, head of iron ore and coal brokerage London Commodity Brokers.

Derivatives volumes still represent less than 10 percent of a physical seaborne market of more than 1.1 billion tonnes a year.

Although many financial players and physical traders have been focusing on this growing market, some of the producers and most large steelmakers have resisted the idea of using these instruments so far.

Many of them said the liquidity is still too low to hedge their whole exposure to iron ore.

"This market is still in its early stage of development - it's growing very fast but it takes time for market participants to embrace it," said Steven Randall of the Steel Index.

"You have got to appreciate that this is a massive change for the steel industry because historically they are not organised to do this."

The largest steelmakers will only trade small volumes in the next few years, until liquidity expands further and they develop the understanding of how to benefit from them.

Within the next five years though, derivatives volumes could reach a similar level to physical trade or even a multiple of it, Randall said. (Editing by William Hardy)