Lee Kirk, Cargill Metals’ managing director, hailed the SGX’s decision to launch the contract, describing it as an exciting development that marked another step in the evolutionary journey for the ferrous market.

“A high-grade iron ore derivative contract is another tool to help the industry more effectively manage its market risk,” he told Fastmarkets MB.

SGX on October 11 unveiled its plans to launch the contract, which references the daily 65% Fe iron ore index published by Fastmarkets MB, in December this year.

The move came in the wake of calls from the industry for an adequate tool to manage the price risk for the high-grade segment of the iron ore market amid China’s growing preference for such materials and volatile differentials between grades.

“The SGX 65% Fe contract will enable more accurate risk mitigation for the more volatile high-grade products and its premium over the mainstream 62% Fe product and derivative,” Andrew Glass, Anglo American’s head of iron ore trading, told Fastmarkets MB.

The MB 65% Fe Iron Ore Index, published daily by Fastmarkets MB, earlier this week rose to its highest since September last year. It stood at $98 per tonne cfr China on Thursday October 25, down from $98.20 per tonne cfr a day earlier.

The index is averaging at $97.10 per tonne cfr so far this quarter. In the fourth quarter of last year, the index averaged $84.69 per tonne cfr.

The gap between the MB 65% Fe Iron Ore Index and the MB 62% Fe Iron Ore Index stood at $21.96 per tonne on October 25.

“With the evolution of Chinese steel mills-led demand for higher grade iron ore, the advent of a high-grade derivative contract is a very welcome development for all industry participants - producers, end users/mills and traders, both physical and financial,” Glass said.

“A liquid paper contract contributes to transparency of the outright high grade and its spread to mainstream,” he added.

Glass also said that the contract would provide the physical market with access to more pricing options.

“In particular, clarity of price expectation for the future, expressed through transactions, will give the industry a valuable high-grade ‘forward curve’. The new 65% Fe derivative allows physical industry participants more accurate access to floating/fixed price flexibility,” he said.

Kirk echoed the same sentiments.

“We anticipate that this development is going to mean faster price discovery, increased market efficiency and better price transparency for high-grade ores,” he said.

“Cargill is an advocate for all of these market principles and we believe this contract will enable the delivery of more sophisticated solutions for our iron ore and steel customers,” he added.

Both Glass and Kirk are optimistic that the SGX contract would attract participation and liquidity once launched in December.

“The general industry sentiment appears to be broadly excited and enthusiastic to transact. Further, a number of financial institutions that have either withdrawn or not yet stepped into iron ore derivatives, anticipate that a liquid high-grade product and the ability to express their opinion, either outright or in the quality spread, should entice their activity,” Glass said.

Kirk noted that the success of the contract would depend on liquidity, as is the case with any new contract.

“We anticipate there will be good initial demand for the contract although long-term success will depend on the degree to which the industry perceives the contract to be an effective way to manage its risk,” he added.

Market participants have previously argued that derivative contracts work well in volatile markets, and given that demand for high-grade ore in China is in line with its government’s environmental protection measures, this is the segment that will likely experience volatility when the Chinese market responds to policy changes.

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