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“We are absolutely already seeing liquidity in iron ore in the US time zone,” SGX head of derivatives Michael Syn said in an interview with Fastmarkets on Wednesday March 14 at the 44th annual International Futures Industry Conference in Boca Raton, Florida.
More traders in Asia continuing to trade into their evenings is one of the key factors driving this increased liquidity, he explained. “The market is starting to trade longer and longer,” he said.
This increased trading activity during US business hours is encouraging US-based participants to follow the price of iron ore more closely and participate in trading more than they have, he said.
That is why it has become clear to the exchange that a significant push is needed to get closer to users in the United States, according to Syn. As part of that strategy, the SGX added five US-based employees to its staff over the last year. All five are part of the exchange’s North American business development team:
“Some people need help understanding why it’s worth connecting to an exchange like SGX,” Syn said. “We make sure we send them information about lots of new Asian asset classes that are developing, which are areas where their consciousness might not be as high.”
Although the US is a heavyweight producer and consumer of commodities, iron ore generally isn’t one of them, according to Syn. That’s because most US steel is produced from scrap, and most iron ore is Asia-centric in terms of price references, he said.
“That’s why this sort of education is important,” he said, pointing to new products such as the SGX’s high-grade iron ore derivatives, which are settled against the daily Fastmarkets MB 65% Fe Iron Ore Index. “There are many things happening in China that impact the US, and an exchange like SGX has them covered.”
The SGX does not view China’s internationalization of its domestic iron ore or coal contracts as a threat to their objectives, according to Syn. “Iron ore is still in the very early stages of network growth,” he said. “If China internationalizes, that helps the network of people who are connected to iron ore prices.”
US companies exposed to global markets can use the SGX’s risk management tools to strip out fluctuations in raw materials prices. “Just as with oil, the price of iron ore and the component prices of the steel value chain turn up in all sorts of ways, in any piece of infrastructure,” Syn said.
SGX’s core customer base is physical market participants. “No one really blindly speculates in iron ore; our customers genuinely have needs that are involved or have roots in the physical business in some respect,” he said. “Our job, apart from trying to make sure more people trade it and find uses for it, is to address the needs of the physical marketplace.”
That is why the exchange continues to work on developing products such as the high-grade iron ore derivatives “to make sure the physical market is entrenched with us,” Syn said.
Succeeding in spreading awareness and usage of SGX products in the US will be an ongoing process, Syn said. “When you’re delivering a service… success is about getting more adoption and more users interacting with each other. Success is a bigger, higher-quality network that is more deeply embedded in the US.”
By comparison, hedging iron ore in Asia gained traction during the 2008-09 financial crisis, according to Syn. Before that, most market participants sold and bought iron ore based on annual pricing models, he said.
“There was a constant and almost unacceptable dislocation between what the fixed price was and what people understood the spot price to be,” he said. “Competition drove an advantage in converting from a fixed to a floating price… All it takes is fear of competitive pressure – that’s what drives evolution.”
The SGX has seen a “tremendous uptick” in iron ore futures trading due to supply concerns following the deadly breach at one of Vale’s tailings dams in Brazil earlier this year.