SINGAPORE, April 17 (Reuters) - Singapore Exchange SGXL.SI said on Friday it will launch the world's first cleared over-the-counter (OTC) iron ore swaps contract, moving the massive market a small step closer to floating prices.
SGX said the contract, which will be settled against a reference price set by The Steel Index, would be launched on April 27, almost one year after Credit Suisse CSGN.VX and Deutsche Bank DBKGn.DE co-launched the first major OTC swaps trade in iron ore, the main raw material for making steel.
The huge market for selling iron ore from the major miners in Australia and Brazil to steel mills in Japan, South Korea and now top producer China has been dominated for decades by annual contracts based on prices set once a year.
But with increased volatility across all commodity markets, including the end product steel, the potential growth for risk management tools such as swaps has expanded, although many in the industry remain reluctant to trade them.
“I suppose it provides more transparency on price settlements. Walking away from current traditional contract price negotiations with the big three miners, the market’s more able to set the price in a transparent manner,” said Paul Cliff, head of metals and mining at Nomura in London.
In May last year, Deutsche and Credit Suisse launched trade in cash-settled iron ore swaps across a range of maturities. Unlike those OTC swaps, however, SGX’s will be cleared via SGX AsiaClear, which will bear the counterparty risks.
“As an active market participant in OTC iron ore swap trading, we recognise the credit issues in the global financial markets. The launch of SGX’s iron ore swap clearing will increase market participation and facilitate the growth of an active iron ore swap market,” said Raymond Key, global head of metals trading at Deutsche Bank.
The size of each iron ore swap contract is 500 metric tons. It will be cash-settled based on the average of The Steel Index’s iron ore reference prices in the expiring month.
The Steel Index provides independent steel and iron ore reference prices based on actual transactions, with data collected from over 375 companies.
Spot prices of iron ore have been steady in recent weeks around $64 a tonne.
Global miners and steel firms are locked in annual talks to settle iron ore term prices for the year starting April 1 and analysts are lowering their price forecasts as a slowing global economy is set to cut steel output sharply. (Reporting by Neil Chatterjee and Ben Tan, additional reporting by Humeyra Pamuk in London; Editing by Jonathan Leff)
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