ThyssenKrupp Mulling Iron Ore Derivatives as Deutsche Bank Says `Game On'

ThyssenKrupp AG, Germany’s largest steelmaker, is among producers considering whether to use derivatives to fix future iron-ore costs after the collapse of a four-decade-old system that set prices annually.

ThyssenKrupp is “developing instruments” to hedge iron ore supplies and curb the effects of swings in prices for the raw material. Deutsche Bank AG, which together with Credit Suisse Group AG started offering so-called iron-ore swaps in 2008, said it’s taking calls from steelmakers who are trying find out more about them.

More iron ore is shipped across oceans than any other dry bulk commodity, with the market forecast by Credit Suisse to total 1 billion metric tons this year. Most sales were based on an annual benchmark price until this year, when the largest miners switched to sales based on quarterly contracts and single cargoes. The use of derivatives is forecast to grow as buyers and sellers try to lock in prices.

“It’s game on,” said Ray Key, Deutsche Bank’s global head of metal trading. “We’ve reached the cusp of everything we’ve been talking about for the last two years.”

ThyssenKrupp, based in Dusseldorf, declined 53 cents, or 2.1 percent, to 24.795 euros in Frankfurt trading.

The company is interested in derivatives after “surprising” increases in iron ore prices this quarter, company spokesman Erwin Schneider said April 23. He declined to say how much iron ore the company may seek to hedge. Key, 37, declined to identify which companies he was talking to when he spoke in London on April 14.

Benchmark Collapse

“People are trying to educate themselves about it because they’re trying to change companies’ 40- to 50-year trade behavior to something completely new,” said Tom Price, a commodity analyst at UBS AG in Sydney.

Iron ore derivatives have been developed as mining companies tried to break the benchmark pricing system to take advantage of rising prices.

Brazil’s Vale SA and Melbourne-based BHP Billiton Ltd., respectively the world’s biggest and third-largest exporters, said in the past month they have switched to quarterly contracts. London-based Rio Tinto Group, the No. 2 producer, is in talks about doing the same.

The end of annual pricing hasn’t been welcomed by all steelmakers. While some steel companies are looking at iron-ore derivatives, they’re still “skeptical,” said Ian Christmas, director general of the Brussels-based World Steel Association.

Unknown Territory

“A lot of financial people will love them to happen,” he said. “The steel industry’s view is they don’t see it as a favorable development.”

The “best” way to price iron ore remains annual contracts, said Gordon Moffat, the director general of Eurofer, a group representing steelmakers in Europe. “We’re in unknown territory here,” he said.

Australian iron ore producers Atlas Iron Ltd. and BC Iron Ltd. said they’re looking at using swaps.

“We will probably put a toe in the water with a ship or two next year if it continues to look good,” said David Flanagan, Atlas’s managing director.

Trading in iron ore swaps, which allow users to fix prices in advance for single cargoes, may grow 10-fold to 1 million metric tons a day in the next two years, Credit Suisse said in February. There has been a sixfold expansion in the past year, according to Deutsche Bank, which partnered Credit Suisse in introducing iron ore swaps two years ago.

Chinese Demand

SGX Asiaclear, the main clearing house for the swaps, said it’s receiving more interest in the derivatives. It’s getting enquiries from local parties and others in China and Hong Kong, said Elena Sng, senior vice-president of clearing and commodities at SGX, which is run by Singapore Exchange Ltd.

SGX cleared 1.09 million tons of ore swaps in the first two weeks of April, compared with 1.39 million tons in March.

Deliveries of iron ore transported by sea will total 219.6 million tons this quarter, according to London-based Drewry Shipping Consultants Ltd.

The cash price for ore has tripled in the past year on record demand from China, the biggest buyer. The price for ore with a 62 percent iron content was unchanged at $182.10 a ton, The Steel Index said today.

“The developments have been much quicker than expected,” said Meindert Witteveen, head of European energy and bulk commodities at Credit Suisse in London. “We’re putting in more effort today because of our view of how big this market is going to be.”

To contact the reporters on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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