Market hails SGX’s decision to launch high-grade iron ore derivative

Market participants have hailed Singapore Exchange’s (SGX) decision to launch a high-grade iron ore derivative, basis Fastmarkets’ daily 65% Fe iron ore price, saying it will serve the burgeoning need for better price risk management tools.

The contract is targeted for launch in December, subject to regulatory approval, the exchange announced on Thursday October 11.

“The SGX’s introduction of 65% futures and swap contracts is very timely given the increased volatility in the high-grade ore market. It allows market participants to hedge their exposure with a more precise contract,” Jyothish George, head of iron ore Glencore, said in the statement.

“As the first derivative product on high-grade iron ore in the market, SGX’s Iron Ore 65% derivatives contract complements their other iron ore contracts and provides greater correlation with price movements in the high-grade seaborne iron ore fines market,” Yang Wei, general manager of Ningbo Steel International, said.

“This allows us to hedge our high-grade iron ore exposure more accurately and also promotes market liquidity,” Wei added. 

Brazilian miner Vale hailed the contract as ‘a natural development’ for the iron ore market and a welcome initiative from SGX.

“As mills are actively seeking high-grade iron ore to enable productivity gains and lower emission levels, the launch of the 65% Fe derivative provides an effective risk management tool for the industry,” Luiz Meriz, global director for iron ore sales, Vale said in the statement.

Participants also said that the contract will serve various other requirements of the evolving iron ore market amid Chinese steelmakers’ preference for higher grade ore.

“The non-linear 65/62 Fe grade differentials and the continuing volatility of the premium for higher grade had made hedging of higher-grade increasingly hard,” Jonathan Chance, head of iron ore at GFI, told Fastmarkets MB.

“The launch of the 65% [derivative] contract should help solve this problem and will help reduce the basis risk for those with physical exposure to material higher than the 62% Fe grade,” he added.

Chance also said that the derivative should reignite interest in the [paper] iron ore market, as the lack of movement on the 62% contracts this year has seen speculative interest dissipate whilst there has still been decent price action on the higher-grade material which currently speculative traders cannot utilize.

There has already been a positive reception from their clients to the new contract, he added.

Another trader source said that it is important to see financial contracts based on indices used in physical contracts and, as such, the choice of Metal Bulletin 65% Fe Iron Ore Index would allow them to hedge their exposure to the high-grade segment efficiently.

A broker source, who did not wish to be named, said: “Most physical players do want a high-grade contract to hedge the increasingly volatile spread between the 65% and 62% indices.”

“The speculators will also be interested in trading the contract once liquidity has stabilized,” he added.

Market participants also welcomed the exchange’s decision to launch an outright contract for high-grade ore.

“We feel an outright 65% contract will be more practical than a premium contract to the current 62% contract and will allow for cleaner and easier execution,” Chance added.

Fastmarkets MB’s daily 65% Fe iron ore index stood at $97.40 per tonne on Wednesday October 10, up $0.30 per tonne from the previous day.

The daily 62% Fe iron ore index stood at $71.14 per tonne, unchanged from the previous day. 

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: