Bank Mine Lending Seen by Credit Suisse Using Iron-Ore Swaps

Iron-ore swaps are being used by more banks in loans to companies developing mines of the steel-making raw material, with about half of the projects funded in the past 18 months involving hedging, Credit Suisse Group AG (CSGN) said.

About five projects financing so-called junior miners used the swaps, which bet or hedge on the future price of iron ore, Phillip Killicoat, London-based vice president of commodities at the bank, said in an interview today. Miners’ access to loans is improving as swaps allow banks including Credit Suisse to lock in future prices received when production starts, he said.

“Swaps make banks more willing to lend if the cash flow is more secure as the equity markets aren’t providing the levels of capital at prices that work for junior miners at the moment,” Killicoat said in Vienna on the sidelines of the 7th EU Iron Ore Conference.

Trading volumes in iron-ore swaps rose to a record last month as prices for iron ore landed in China rebounded from $86.70 a dry metric ton on Sept. 5, the lowest since October 2009. September volumes traded totaled 17.7 million tons, according to Singapore-based clearing house SGX AsiaClear, the biggest clearer of over-the-counter swaps. Volumes for the first nine months of 2012 at 75.5 million tons were 193 percent higher than the same period last year, data show.

Prices for ore landed in China with 62 percent iron content are 35 percent higher since Sept. 5, the Steel Index figures show.

Physical Volumes

Trading in swaps, which has been doubling each year since 2008, should equal physical volumes of more than 1 billion tons a year by as early as 2015, Killicoat estimated. About 70 percent of seaborne iron ore is bought or sold under monthly or quarterly contracts based on the daily price, and a further 25 percent on the spot market, he estimated at the conference yesterday.

Growth in the use of iron-ore swaps is centered on end- users of steel, such as refrigerator manufacturers and car- makers who can’t raise prices to pass on higher iron-ore costs, Killicoat said. Steel mills were less likely to use swaps and pass on higher raw material costs to manufacturers, he said.

To contact the reporter on this story: Michelle Wiese Bockmann in London at mwiesebockma@bloomberg.net

To contact the editor responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net

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