Strong first-day interest for SGX’s high-grade iron ore derivatives

The Singapore Exchange (SGX) launched the world’s first high-grade iron ore derivatives on Monday December 3, ushering in what has been described as the next stage of evolution for the steelmaking raw materials market.

A total of 1,400 lots – or 140,000 tonnes – of futures contracts for the first six months of 2019 were cleared between 7.10am and 6pm Singapore time, market sources told Fastmarkets MB.

The SGX’s high-grade iron ore derivatives are settled against the daily Fastmarkets MB 65% Fe Iron Ore Index.

“We are encouraged by the strong interest shown in the SGX MB 65% Fe contracts on the first trading day,” William Chin, the exchange’s head of commodities, said.

“The product launch addresses the risk-management needs of the physical industry amid a structural change in China’s environmental policies, and reflects an evolution in trading sophistication by the trading community looking for opportunities to express views in ore grade differentials,” he added.

“Now there is some clarity on the forward curve for the high-grade segment,” a trader source in Singapore said.

Anglo American, which produced around 36 million tonnes of iron ore in the January-September period of this year, was among the first companies to trade the futures contract, leading to a participant describing it as an “innovative producer.”

The miner produces high-grade iron ore products, including concentrate, and has been quite open about the need for a derivative contract to boost efficiencies in the pricing of the high-grade segment.

Andrew Glass, the miner’s head of iron ore trading, had previously said that the contract would allow more fixed-price trades to be concluded in the concentrate segment as well with stakeholders now being able to hedge their exposure using the 65% Fe iron ore derivatives.

Other companies that were actively trading on Monday included international traders and investment banks, according to market sources.

Brokers cited “good reception” for the contract on the first day. They expect interest to only grow in the coming days and months.

“A lot of the physical players were involved today and overall I would say this augurs well for the contract,” a second trader source said.

“Some investment banks are likely to be interested in the derivatives as well and we expect activity from financial players to go up,” a broker source added.

Another source at an international trading company said that it had “already put in orders to trade the contract.”