FIS in conjunction with LCH.Clearnet has broked the first CNF China iron ore swap a new derivative contract developed to reflect changes in the structure of this vital commodity market.
Iron ore shipments to China have so far increased 22% in 2009, resulting in an acceleration of freight rates, which have risen sharply in the first half of the year. The average of 4 timecharters on the Baltic Exchange Capesize Index began 2009 at 8,997 and stood at 67,729 on June 1.
The iron ore swap contract has been developed to reflect the increase in spot trading and the move away from sales through the annual benchmark price negotiation.
Mr John Banaszkiewicz MD of FIS said that “We are pleased to trade the first ever LCH.Clearnet iron ore swap. We believe that given the rapidly changing iron ore market, more companies will phase out their use of the benchmark price and trade spot, driving the greater use of risk management with derivatives. With only 15% of the 2009 iron ore requirement fixed so far, we are urging the China Iron and Steel Association to scrap the benchmark and embrace greater spot fixing.”
Mr Joe Radmore Freight and Iron Ore Trader at Morgan Stanley, which is one of the most active traders in this market, said that “Iron ore trading compliments Morgan Stanley's freight business which shipped several million tonnes of third party iron ore last year on our own time-chartered vessels. We view being able to clear iron ore derivatives as a big ste p forward in increasing liquidity to the market. Combined with bigger physical volumes of iron ore trading in the spot market, this market should really grow within the next 12 months.”
Mr Mark Lyons Trading Manager, Iron Ore and Steel Derivatives at Cargill said that “Cargill has been trading iron ore swaps for nine months and now the availability of a cleared contract will enable us to protect the value of assets and will also result in improved transparency for the buyers and sellers, particularly beneficial to the mills and mines.”
Isabella Kurek-Smith director of energy and freight at LCH.Clearnet said: “The enthusiasm for this ground-breaking new service indicates that there is a strong market demand for iron ore swap clearing. The timing of the launch is exceptional as interest in this nascent market develops, volumes continue to grow and participants increasingly look to reduce their counterparty risk.
The Iron Ore Swap operates as a bilateral, over-the-counter cash-settled contract, under an international swaps and derivatives association agreement. Traders can elect one of three indices to settle against; The Steel Index TSI; Metal Bulletin MBIO; Platts Iron Ore Index. Trades can be made on a per month, per quarter or per calendar year basis and prices quoted up to 24 months forward.
