Singapore Exchange plans to launch new high grade iron ore swaps and futures contracts in December, referencing Fastmarkets MB's 65%-Fe Brazilian fines index, SGX said Thursday.
Details on the new contracts have yet to be made available and the launch of the derivatives is subject to regulatory approval.
The availability of a new hedging tool for high grade fines was welcomed by market participants, given stronger Chinese demand for higher quality iron ore products over the year due to more stringent environmental regulations.
"Previously, market participants had no derivatives available to hedge their exposure towards high grade fines and concentrate. The current 62%-Fe swaps and DCE [Dalian Commodity Exchange] futures in the market are mainly used for hedging medium grade fines," a source said.
Market participants were optimistic that less liquid high grade fines and concentrate would be more readily available in the spot market, with the development of a suitable risk management tool.
"South African higher grade fines are currently sold at strong premiums over the 62%-Fe index, where it is difficult to determine true market value due to its different nature from typical medium grade Australian fines," a trader said. "With the development of a swaps market for high grade iron ore, sellers could hedge their risks better and we could expect more spot availability and reselling in the secondary market," the trader added.
With high grade Carajas fines relatively illiquid compared with medium grade fines, market sources indicated that the number of active participants might be limited as compared to that of the 62%-Fe swaps market.
The new high grade derivatives are targeted at the smaller number of buyers who want to cover the risk of their long physical positions on Carajas fines, a Chinese trader said. "The lack of volatility in iron ore prices has resulted in lower trading volumes on SGX and DCE over the past year, leading to less liquidity. This might be the same for the high grade swaps market," the trader added.
"The liquidity of a high grade swaps market is dependent on how active the physical high grade iron ore market is. Given that Carajas fines are mainly sold through long-term contracts to end-users, more spot cargoes will have to be offered in the market to support liquidity," an eastern Chinese mill source said.
"Currently, some traders utilize the 62%-Fe swaps to hedge their high grade fines exposure through locking in a spread between the 62% and 65%-Fe indexes, given the liquidity of the 62%-Fe swaps market, another Chinese trader said. Market participants will need some time to assess which option is more suitable, the trader added.
