Vale Int (LSE:VALE)
Historical Stock Chart

From May 2019 to May 2024

Iron ore swap volumes are growing steadily but future growth will depend on whether the China Iron and Steel Association gives domestic steelmakers consent to use swaps in order to hedge their iron ore purchases, Raymond Key, the global head of metals trading at Deutsche Bank said.

"The real watershed event for iron ore swaps will be the eventual backdown by CISA from its anti-iron ore swap stance so that domestic Chinese steel mills can take advantage of the swaps," Key told Dow Jones Newswires in an interview.

CISA, an influential trade body, has in the past discouraged its members from using iron ore swaps. Even the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters advised its members against trading cash-settled swaps on grounds that they carry higher risks than more traditional over-the-counter market products.

Iron ore swaps are over-the-counter derivative contracts used by steel producers and other iron ore market participants to hedge against volatility in the physical iron ore spot market. The swaps are settled against indexes from Metal Bulletin and The Steel Index.

Key estimates about 16 million metric tons of iron ore swaps have been traded globally since Deutsche Bank launched the contracts alongside Credit Suisse (CS) in May 2008.

"It's a very good number given that the iron ore swap is in its infancy but the landed sea-borne iron ore market into China is approximately 400 million tons, so we have a long way to go," Key said.

Iron ore swap trading activity picked up significantly this year after annual benchmark negotiations between the world's three largest miners - Brazil's Vale SA (VALE) and Anglo-Australian miners Rio Tinto PLC (RTP) and BHP Billiton Ltd (BHP) - and the China's largest steelmakers (represented by CISA) broke down.

"This year we haven't had an official benchmark settlement (for China). You have had a lot of participants who have had to get involved" in iron ore swaps and spot iron ore trading as a result.

Key said some Chinese steel mills are already involved in iron ore swaps, but to a limited degree. Steady growth in iron ore volumes led the U.K.'s LCH.Clearnet and the Singapore Exchange Ltd (SGX) to launch clearing services for swaps in order to help investors mitigate credit and counter-party risk.

 
   Company Web site: http://www.db.com 
 

-By Alex MacDonald, Dow Jones Newswires; +44 (0)20 7842 9328; alex.macdonald@dowjones.com