For the first time in the history of the commodity, iron ore has been traded on an exchange.
Since the first Over?the?Counter (OTC) iron ore Swap was launched by Deutsche Bank and Credit Suisse in May 2008, an estimated 9,000,000 metric tonnes of swaps have been traded. However, all of these trades have been concluded on a bilateral basis with contracting parties being open to counter?party risk.
Singapore Stock Exchange (SGX) announced on April 17, 2009, that it would launch the world’s first cleared OTC Iron Ore Swap contract via the SGX AsiaClear® platform on April 27, 2009. The contract trades in lot sizes of 500 metric tonnes and is cash settled against the monthly average of The Steel Index 62% Iron Ore Fines CFR China reference price, in the expiring month.
Exchange clearing by AsiaClear® mitigates the counter?party risk in OTC trading of financial iron ore swaps. Furthermore, the move will help the development of liquidity in the instrument which will be critical in the market becoming firmly established.
London Dry Bulk Ltd. (LDB), the world’s only specialist broker of iron ore in the physical and financial markets, brokered the first trade on opening of trading at 8am today [April 27, 2009]. LDB CEO Clive Murray said, “We are very proud to be part of these developments in the iron ore industry and to have brokered the first iron ore trade on SGX AsiaClear.” LDB has been a key participant in the development of the market in iron ore swaps from the beginning, and leverages its expertise in developing a prompt market in coal to make iron ore as successful. The company actively brokers iron in both the physical and financial markets. “To be successful, particularly in the current economic environment, a company’s ability to maintain profit margins remains key. With the establishment of iron ore swaps trading and the already active trade in financial steel contracts we are promoting the concept of hedging a company’s spread. This is similar to what happens daily in the energy sector where companies trade the dark? or spark?spread. In the steel industry we would like to see the development of the ‘Red Hot Spread’,” adds Clive Murray.