ICAP Launches Iron Ore Derivatives Trading Service
May 12 2009 - 10:59PM
Dow Jones News
London-based broker ICAP PLC (IAP.LN) said Wednesday it is
launching a new broking service for global iron ore derivatives,
joining the growing list of companies offering nonphysical trade in
the key steel making input.
Benchmark iron ore prices are set once a year in annual contract
negotiations between the biggest producers and consumers, but some
industry participants, led by miner BHP Billiton Ltd. (BHP),
believe the old system is out of date and doesn't reflect changes
in the price during the year.
ICAP said the volatility in the spot price of iron ore over the
past 18 months has highlighted the flaws in the benchmark system
which doesn't have the flexibility to allow buyers and sellers to
manage the risks of price movements.
As a result increasing numbers of physical market participants
are entering into swap agreements that provide price certainty and
flexibility, the broker said.
"ICAP has proven its ability to build derivative liquidity and
transparency in emerging asset classes, and we believe the physical
transition being observed in today's iron ore market offers
interesting opportunities," ICAP Energy Managing Director Paul
Newman said in a statement.
ICAP will join the Singapore Stock Exchange, Credit Suisse and
Deutsche Bank which have all launched over the counter markets in
cash settled iron ore swaps in an effort to tap the growing
appetite for hedging instruments to mitigate the risks of a
volatile iron ore market.
Deutsche Bank estimates it has traded 10 million metric tons of
iron ore swaps since launching in May last year and expects to
trade up to 40 million tons in the coming year.
BHP Billiton, one of the three big iron ore miners alongside Rio
Tinto Ltd. (RTP) and Companhia Vale do Rio Doce (RIO), has been
arguing hard for a move away from benchmark pricing and favors a
move to indexed pricing.
BHP Iron Ore President Ian Ashby last week pointed out there are
now three internationally recognized independent pricing reference
points that can be used for indexing prices: Platts, Metal Bulletin
and Steel Business Briefing.
"As a result of these developments, the industry is now well on
the way to moving from a fixed pricing mechanism, represented by
the benchmark system, towards a fully developed commodity market,"
he said.
Ashby said BHP supported all initiatives that move the market
towards more transparent pricing.
-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094;
alex.wilson@dowjones.com