SGX to Introduce Iron Ore Futures as Investors Bet on China

SGX AsiaClear, the world’s largest clearer of iron ore swaps, is scheduled to start a futures contract for the steel-making commodity next week as investors seek to bet on the pace of Chinese growth and swings in prices.

The Singapore-based clearing house, a unit of Singapore Exchange Ltd. (SGX), will offer the contracts from April 8 alongside the swaps, according to a statement on its website. One futures contract will be 100 metric tons compared with 500 tons for the swaps, the website shows. The planned start, which was delayed from February, was confirmed by Joan Lew, a spokeswoman.

Global demand for seaborne ore has doubled since 2004 as China emerged as the world’s second-largest economy, ramping up steel output to support the construction of infrastructure and the manufacture of consumer appliances. As demand expanded, pricing shifted from annual contracts set between mining companies and steel mills to shorter-term agreements and increased spot sales. SGX joins CME Group Inc. and Intercontinental Exchange Inc. in offering ore futures.

SGX may be seeking to meet an expected increase in demand from U.S.-based traders, said Kerry Deal, head of iron ore and bulk derivatives at Jefferies Hong Kong Ltd. “They look at this as a good China play. China is continuing to grow and this is a China-priced product,” he said in a phone interview.

Photographer: Munshi Ahmed/Bloomberg

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Photographer: Munshi Ahmed/Bloomberg

The SGX Centre which houses the Singapore Stock Exchange Ltd., center, stands illuminated at dusk in Singapore.

Tianjin Prices

The contract will be settled in cash against The Steel Index Ltd. price for Tianjin, which refers to ore with 62 percent content delivered to the Chinese port. Trading will run for 12 hours from 8 a.m. in Singapore, and contracts will be offered for as many as 48 consecutive months from the current month, the website said.

“There’s a sense that in the long run, the market is shifting more towards a listed future, that regulators everywhere have a more favorable view of futures than they do of the OTC cleared swap,” said Deal, using the initials for over- the-counter.

U.S. regulators, guided by the 2010 Dodd-Frank Act designed to curb excessive risk-taking after the financial crisis, now require most privately negotiated swap trades be backed by a clearinghouse that’s capitalized by the largest banks. That means dealers and customers have to post upfront collateral.

Trading in iron ore was near a record last month at 20 million tons, The Steel Index said yesterday. The total in over- the-counter swaps and options cleared by exchanges was up from 7.9 million tons a year earlier and compares with the all-time high of 20.3 million in September. Volume in the first quarter was 58 million tons, from 21.2 million tons in the same period last year and more than the total for all of 2011, it said.

‘Systems Testing’

The introduction of the new product, which had been set to start on Feb. 25, was postponed for six weeks to “provide member firms sufficient time to prepare their trading and clearing support, including conducting necessary systems testing,” SGX AsiaClear said in a Feb. 21 statement.

Iron ore in Tianjin was at $135.90 a dry ton yesterday, 6.2 percent lower this year, according to The Steel Index. The price averaged $128.30 in 2012, swinging between a high of $149.40 in April and low of $86.70 in September.

Global seaborne demand has surged from 610 million tons in 2004 to an estimated 1.258 billion tons this year, according to Morgan Stanley. China, the largest steelmaker, will account for about 66 percent of the total. Iron ore is the world’s biggest seaborne cargo after oil.

China’s Imports

Prices may slump as much as 34 percent to $90 a ton by the end of December on expectations for increased supply, according to the median of seven analyst estimates compiled by Bloomberg in a survey published yesterday. Goldman Sachs Group Inc., which forecasts an average price of $139 in 2013, expects China’s imports to climb 4 percent, the least in three years.

Investors can trade swaps handled by brokers including SSY Futures Ltd., GFI Group Inc., Clarkson Plc and Freight Investor Services Ltd. Intercontinental Exchange, the operator of regulated exchanges and clearinghouses, said on Jan. 28 that it planned to start two kinds of iron ore futures on the ICE Futures Europe Exchange from Feb. 11.

China’s economy is set to expand 8.1 percent this year after the weakest annual growth in 13 years in 2012, according to the median estimate of analysts surveyed by Bloomberg. Brazil’s Vale SA (VALE5) together with London-based Rio Tinto Group, Melbourne-based BHP Billiton Ltd. (BHP) and Perth-based Fortescue Metals Group supply 71 percent of seaborne iron ore cargo.

A record 108.9 million tons of iron ore swaps were cleared by SGX AsiaClear last year, which clears more than 90 percent of the swaps, according to its website.

Shares in SGX ended little changed at S$7.57 in Singapore. That’s 8 percent higher this year, valuing the company at S$8.09 billion ($6.53 billion).

To contact the reporters for this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net; Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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