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The product is targeted for launch in December, subject to due regulatory process, the exchange added.
“The seaborne iron ore market has continued to ‘financialize’ and evolve since we cleared the world’s first [over-the-counter] iron ore swaps contract almost a decade ago,” William Chin, the exchange’s head of commodities, said.
“A high-grade contract is an important addition to our iron ore suite, backed by strong market interest reflecting a structural shift in China’s environmental policy,” he said.
“We are delighted with the strong partnership with Fastmarkets in driving price transparency in a 65% Fe contract that will add new liquidity to the bellwether 62% Fe contract, allowing market participants to hedge and trade the grade differentials,” he added.
Fastmarkets price development director (metals and mining) Christopher Ellis said that the price reporting agency was pleased to partner with the SGX to bring to the market a new high-grade derivative settled against its MB 65% Fe index.
“The increased volatility in inter-grade spreads has led to broad market support for a high-grade iron ore derivative and makes it the next logical step in the evolution of the iron ore market,” he said.
The decision to launch the cash-settled contract follows calls from the industry for a suitable price risk-management tool related to their exposure to the high-grade iron ore segment.
The basis of settlement for the SGX’s new product – the MB 65% Fe Iron Ore Index, published daily by Fastmarkets – is used widely in physical contracts.
The SGX accounts for the bulk of the ex-China iron ore derivatives market and offers various price risk-management tools across different grades of iron ore products.
The exchange has been endorsing the “virtual steel mill model” to offer a suite of ferrous derivatives amid the segregated nature of the upstream and downstream ferrous markets.
“The launch of a high-grade derivative will usher in the next phase of evolution for iron ore,” Jamie Pearce, the executive director of SSY Futures, told Fastmarkets last month.
Andrew Glass, head of trading at Anglo American, told Fastmarkets at the time that besides serving as an efficient risk-management tool for those with exposure to the 65% Fe iron ore fines segment, a high-grade derivative would also be useful for those trading in other materials such as iron ore concentrate.
Robust margins enjoyed by Chinese steel mills since 2017 have resulted in widening gaps across iron ore grades, with demand for high-grade materials being driven by mills’ eagerness to increase productivity and the government’s focus on greater environment protection.
The increasing preference among steelmakers for high-grade iron ore has been described as a “structural change” by global miners.
Fastmarkets’ daily MB 65% Fe iron ore index is based on a tonnage-weighted calculation, with actual transactions carrying the full weight as reflected by the reported volume.
Fastmarkets publishes a daily pricing rationale to explain the movement of the index, along with its daily commentary for the iron ore market.
The price reporting agency has completed an external assurance review for several of its prices, including the MB 65% Fe Iron Ore Index.
Our team will be discussing the new SGX 65% Fe derivative contract in a live webinar on December 11. They will examine how changes in the iron ore market have prompted the need for this high-grade derivative, the opportunities the contract offers and the methodology behind our iron ore index. Register here: http://bit.ly/sgx-65-webinar.