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Iron in the melting pot: will derivatives emerge?
06 October 2009
With international trade of nearly 900m tonnes a year, iron ore is one of the biggest bulk commodities in the world that is not traded on exchanges. Only recently has the market’s established pricing system come under strain, hastening the dawn of derivatives. Agnieszka Troszkiewicz looks at the nascent iron ore swap market, prospects for growth, and perhaps eventually a listed futures market.
May 23, 2008, will go down in history as a watershed for the iron ore industry. Credit Suisse and Deutsche Bank officially launched the first over-the-counter iron ore swap market, carving a path for others to follow.
Today, a handful of banks including Morgan Stanley and Barclays Capital provide the same services, while both the Singapore Exchange and LCH.Clearnet have started clearing iron ore swaps. They are joined by brokers, opening iron ore desks day after day.
It seems like a long way from where the iron ore industry was a few years ago. For decades, prices were set on an annual benchmark basis by a clique of companies and their steelmaking customers.
But surging prices and volumes in the spot market, largely driven by demand from China, exposed what many see as the need for a derivatives market. And with the leading players’ failure to establish a benchmark price...
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