Shipping companies eye iron ore swap contracts

LCH Clearnet will clear the contracts, settled against the price of delivered iron ore sold on the spot market.
“I have not done a deal with a shipping company yet but I can assure you they are very interested,” FIS managing director John Banaszkiewicz said.
“With iron ore they want to know where the prices are because it is very much a driver for the freight market.
“Also, many of these shipping companies have created their own derivatives departments and they may see arbitrage opportunities.”
Clearing houses act as the central counter party between the seller and buyer of derivatives contracts, removing the risk of default.
LCH Clearnet’s move comes after the Singapore Exchange also launched a cleared OTC iron ore swap contract in late April.
An estimated 850m tonnes of iron ore, worth US$160bn, was shipped in 2008. About 85% was sold at an agreed annual price, set by the big three producers, Brazil’s Vale, and Australian miners Rio Tinto and BHP Billiton.
However, Asian steel mills, the major buyers of iron ore, increasingly demand sales from producers at cheaper spot market prices.
India is the only country where iron ore is currently sold at spot prices, supplying China with about 80m tonnes of the estimated 440 tonnes it imported last year.
BHP Billiton, as well as traders such as Cargill and “small Chinese accounts”, had begun trading in the iron ore swap contracts, Mr Banaszkiewicz said.
However, the vast majority of contracts were bought or sold by banks including Credit Suisse, Deutsche Bank and Morgan Stanley, he said.
The first two banks co-launched iron ore swaps contracts in May 2008 but trading risks have stymied development.
“The market for iron ore swaps traded on a bilateral basis has not really taken off because of credit issues, so clearing will definitely benefit the market,” LCH Clearnet spokesperson Isabella Kurek-Smith said. The clearing house currently clears about 85% of all dry bulk forward freight agreements.
FIS believed that companies with capesize exposure would benefit in selling iron ore and freight contracts. The derivatives broker is one of the top five in the US$125bn dry cargo FFA market, but has seen first-quarter contract trading volumes fall by more than half, compared with the same period last year.