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The Singapore Exchange’s (SGX) 65% Fe iron ore contract registered a record high trading volume of 18,895 lots on Wednesday August 13, driven by robust demand for high-grade material in the physical market. The surge marks a continuation of the contract’s strong performance, following a record-breaking July when over 90,000 lots were traded.
The heightened demand for premium LAPS (low alumina, phosphorus, and silica content) iron ore, stems from Chinese steelmakers facing increasingly stringent sintering restrictions. This necessitates the use of higher-grade ores to boost efficiency and maintain output.
A significant factor contributing to these restrictions is China’s upcoming military parade on September 3, alongside ongoing efforts by Beijing to address coal production overcapacity and oversupply, which has underpinned coke prices and increased demand for higher-efficiency iron ore, according to sources.
“Price volatility is very often the key element that determines trading liquidity behind a derivative contract, and this was clearly reflected on Wednesday August 13,” a trader from Singapore said.
“Trading houses that sold off September and October positions to hedge against downside risks earlier in the trading day quickly bought back some lots following the IOCJ cargo trade on the platform,” the trader said.
On Wednesday, a 170,000-tonne cargo of 65% Fe Iron Ore Carajas fines (IOCJ) with a bill of lading dated August 11 traded on a trading platform at $121.15 per tonne CFR Qingdao.
The trader told Fastmarkets that the IOCJ deal had reversed trading sentiment toward the end of the day, with some traders buying more September and October positions before market close.
The spread between Fastmarkets’ iron ore 65% Fe Brazil-origin fines cfr Qingdao index and Fastmarkets’ iron ore 62% Fe fines cfr Qingdao index averaged around $18.20 per tonne in the first week of August, up by $3.22 per tonne (21%) from the spread in July, which averaged $14.98 per tonne.
“We are pleased to witness growing market adoption in the 65% Fe contracts. The contracts provide a more precise hedge for the high grade iron ore market which is increasingly relevant in steel making,” Tan Tee Yong, head of commodity derivatives at SGX Group, said.
“Over 17,000 lots of SGX MB Iron Ore CFR China (65% Fe Fines) Index Futures were traded, building on July’s record-breaking month of over 90,000 lots traded,” Przemek Koralewski, head of market development at Fastmarkets, said.
Koralewski emphasized the contract’s utility, saying: “The 65% futures contract provides a great tool for traders and mills to hedge their high-grade products, including fines, pellets, and pellet feed, but also for people to express their view on mills’ profitability.”
Andrew Wells, editorial director for ferrous metals at Fastmarkets, highlighted the long-term implications: “The high trading volumes of the 65% Fe iron ore swaps point toward the future of iron ore, where high-Fe materials will set the tone for steelmaking in the future.”
Elaborating on the drivers of demand within China, Wells said: “China has been seeing strong demand for high-grade sintering fines recently on the back of sintering and steel production restrictions. This has translated into growing appetite for low-impurity ores such as Brazilian 65% Fe iron ore fines, which generally has lower alumina, silica and phosphorous levels. Steady steelmaking margins and recent increases in domestic coke prices have also supported demand for high-grade iron ore fines.”
The record trading volume underscores the growing importance of high-grade iron ore derivatives as market participants seek effective tools to manage risk and capitalize on evolving dynamics in the global steel and raw materials sectors.
SGX’s 65% Fe iron ore contract is settled against Fastmarkets’ daily index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao, which undergoes an annual International Organization of Securities Commissions (Iosco) audit. It was launched on December 3, 2018.
The contract has seen growing volumes on a year-on-year basis, with SGX reporting a new record of 9 million tonnes cleared in July. This is an increase of 54% from June, and an increase of 88% from the same month last year.
Fastmarkets also publishes a suite of mid- and high-grade iron ore indices, including the newly-launched 61% Fe iron ore fines index, which has seen a 78% surge in trading activity since its launch on June 2:61% Fe fines, cfr Qingdao62% Fe fines, cfr Qingdao62% Fe low-alumina fines, cfr Qingdao58% Fe fines high-grade premium, cfr Qingdao62.5% Fe Australia-origin lump ore premium, cfr Qingdao67.5% Fe pellet feed premium, cfr Qingdao67.5% Fe pellet feed, cfr Qingdao65% Fe concentrate premium, cfr Qingdao65% Fe concentrate, cfr Qingdao
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