Iron-Ore Swaps Trading Drops 9.2% From Record on Price

Iron-ore swap volumes cleared by SGX Asia Clear dropped 9.2 percent in October from a record 17.7 million metric tons in the previous month because of a holiday in China and as prices stabilized.

While still more than double from the year-earlier period, the iron-ore swaps volume fell to 16.1 million tons from the previous month, according to data on the exchange’s website. Ore with 62 percent content delivered to the Chinese port of Tianjin gained 14 percent last month after jumping 17 percent in September and dropping 24 percent in August.

“It’s seasonal,” said Angus Staines, an analyst at UBS AG in London, referring to the holiday in China and lower speculative trading compared with September. “I expect trading volumes to go higher. It’s a structural shift, and the volumes will continue to lift.”

Total volume of iron-ore swaps and options cleared this year may almost triple from 2011 to as much as 150 million tons, Oscar Tarneberg, senior analyst at The Steel Index Ltd. in Singapore, said by e-mail today. That would make it a $19 billion-dollar market, based on the average price this year.

November iron-ore swaps jumped 3.1 percent to $117.50 a ton yesterday, the highest price since July 31, SGX AsiaClear data show. The swaps are based on the spot price of ore with 62 percent content arriving at China’s Tianjin port, published by the Steel Index. The benchmark contract declined 0.2 percent to $120.10 a ton today.

Swaps Trade

Markets in China were closed for the first week of October for the National Day holidays. Iron-ore swaps rose 91 percent in October 2011 from the previous month despite a week-long celebration, the SGX data show.

Deutsche Bank AG and Credit Suisse Group AG started swaps in 2008 and the Singapore Mercantile Exchange began futures in 2011. Swaps trading more than doubled in 2011, according to London-based broker Freight Investor Services.

“Iron has gone through a very big change in the last few years,” said Simon Collins, director and head of dry bulk commodities at Amsterdam-based commodities trader Trafigura Beheer BV. “Prices are becoming more and more spot, and as a result you see more volatility in the spot market, and more use of swaps, as people are trying to hedge themselves.”

Iron ore’s 100-day historical volatility is at 32 percent, more than in gold, platinum, palladium and the main industrial metals traded on the London Metal Exchange, data compiled by Bloomberg show.

Trading Records

SGX has accounted for 95 percent of the total volume of iron-ore swaps cleared this year, and for 83 percent if options are included, according to The Steel Index. Iron-ore swaps trading posted records for three consecutive months through September, data from SGX show.

“Iron ore has got a huge amount of attention because it’s such a big driver in economies, such as Australia’s,” said Ray Key, global head of metals at Deutsche Bank, who helped develop the swaps. “Hundreds of billions of dollars are being invested in mining projects. And behind that you’ve got huge amounts of equity money invested in mining companies.”

The options market will continue to grow, while anyone planning to start iron-ore futures will have to convince the market about their advantages over swaps because “most people are relatively comfortable with the way iron ore trades now,” Key said.