Iron Ore Swap Market Participation Has Doubled in 2010, Credit Suisse Says

The number of iron ore swap traders doubled this year as producers of the steelmaking raw material including Vale SA and BHP Billiton Ltd. began setting prices each quarter instead of annually, Credit Suisse Group AG said.

ThyssenKrupp AG, Germany’s largest steelmaker, is among those considering using the derivatives to hedge against more rapid price swings. The swaps allow buyers and sellers to fix prices for single cargoes of the material months in advance.

“There are now over 100 participants trading iron ore swaps, a doubling since the start of the year,” said Phillip Killicoat, a trader of the material in London at Credit Suisse, which began offering swaps in May 2008 with Deutsche Bank AG.

Trade grew to about 5 million metric tons in April, from 2.8 million tons in March, after the end of 40 years of annual benchmark prices, he said. Rio Tinto Group, the third-biggest iron-ore exporter, is in talks on switching to quarterly prices, joining Vale and BHP, the first- and third-largest producers.

“For steel mills the adaptation process continues,” said Killicoat at Credit Suisse. “There’s a big change that has occurred with moving to quarterly index pricing, they are now evaluating what their options are,” he said in an interview.

ThyssenKrupp is interested in the derivatives after “surprising” increases in prices of the company’s main raw material this quarter, spokesman Erwin Schneider said April 23.

Swaps trading cleared on exchanges totaled 2.5 million tons in April, with over-the-counter trades carried out off exchanges about the same, Killicoat said in the interview in Prague on May 6. Steel mills have the choice to hedge themselves using swaps, or try to “pass on variability in the iron ore and coking coal to their steel customers,” he said.

Singapore Exchange Ltd. cleared a record 2.2 million tons of iron-ore swaps last month, up from 1.4 million tons in March, on rising demand from Asian mills, traders and shippers.

To contact the reporter on this story: Firat Kayakiran in Istanbul at fkayakiran@bloomberg.net

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