SGX outlines need for risk management as Chinese iron ore buyers respond to margins, environmental norms

“China’s long-term aim to tighten regulations on emissions are pointing to increased demand for high-grade iron ore and thus the [need for] 65% Fe derivatives to hedge,” he said at the Fastmarkets MB iron ore conference in Beijing at the end of February.

Since SGX launched its 65% Fe iron ore swaps and futures in December last year, trading by 33 participants has totaled 3.65 million tonnes, according to the exchange.

More than half of the participants were Chinese mills or traders, indicating “demand from physical players,” Tan said.

Based on data from 2014 to early 2019, steel margins for steelmakers tend to be closely associated with the volatility in iron ore prices, Tan also said.

From 2017 to late 2018, Chinese mills’ margins were largely on the rise, with iron ore price volatility generally decreasing during that period. At the end of last year, when steel margins dropped, iron ore volatility started to trend higher, he added.

“Logically thinking, when profitability shrinks, mills would shift their focus from production rates to cost controls by means including hedging,” he told delegates, adding that iron ore volatility would probably stay high if mill margins were to be structurally lower this year.

SGX cleared 1.3 billion tonnes of iron ore swaps, futures and options in 2018, compared with 1.64 billion tonnes and 1.67 billion tonnes in 2017 and 2016 respectively, according to Tan.

The exchange cleared 162 million tonnes in November, a single-month high in 2018, before a rise in January 2019 to 179 million tonnes.

Between November 2018 and January 2019, about a quarter of SGX iron ore derivatives volume was from Chinese steelmakers or trading companies, while about one third was from financial participants, he added. Those compared with 16% and 35% respectively a year earlier.