Smaller Chinese steelmakers will be able to hedge their costs

Smaller Chinese steelmakers will be able to hedge their costs

AUSTRALIAN iron ore producers, arguing for a freight premium to be included in this year’s contract prices with reluctant Chinese steelmakers, are expected to shrug off the emergence of a new iron ore exchange market created by Deutsche Bank and Credit Suisse.

The exchange gives smaller Chinese steel producers a chance to hedge their costs in the face of increased iron ore prices.

Iron ore is one of the world’s most traded commodities, with the market dominated by Rio Tinto, Brazilian miner Vale and BHP Billiton.

The exchange works like this: the two banks use an index of iron ore spot prices, gathered through a survey of buyers, based on the delivered price to China, which is the biggest user of traded iron ore.

A cash-swap is offered on a forward market that runs as late as the end of next year.

Prices have been rising as demand seemingly outpaces supply while China looks to rein in the ability or Rio and BHP from capitalising on the more lucrative spot market.

Some global steel industry players, frustrated by the rapid run-up in iron ore prices, are bypassing mining giants and buying the mineral through the new market.

The exchange offers one of the first windows into the largely secretive and guarded world of iron ore trading. Unlike buying other commodities, such as copper, aluminium or gold, iron ore trading has been opaque for decades.

Iron ore prices on the spot market have more than doubled to $US185 a tonne in the past year, mainly as a result of strong demand from emerging economies in Asia and constraints on the transportation and delivery system. The biggest impact has been felt by steelmakers, who have largely lost what little negotiating power they have had with their bigger and more powerful iron ore providers.

At this point, the impact of the iron ore exchange has been limited. In the first week since the exchange was operating, Credit Suisse traded about 1.1 million tonnes of iron ore worth about $US250 million. That is a pittance compared to the 1.1 billion tonnes of iron ore produced around the world.

But it does begin levelling the playing field, says Kamal Naqvi, who helped design the new exchange for Credit Suisse.

“There’s never been transparency in the iron ore market,” he said. “For the first time, steelmakers would have a choice to fix the price today.”

Marius Kloppers, chief executive of BHP Billiton, said he backed a more transparent system for buying and selling iron ore. He believed iron ore would be more fairly priced if deals were no longer conducted in relative secrecy.


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