core sector communique

Iron ore swaps volumes smash previous records as spot price collapses in August

TSI-based iron ore swaps and options trading volumes in August soared past previous records.

The volume of iron ore swaps cleared on the Singapore Exchange (SGX) in August surged 42% on July (itself a record month) to 14.88 million tonnes. The level of open interest on SGX also passed a notable milestone, exceeding 10 million tonnes (20,000 lots) for the first time on 30 August.

It was a similar story for TSI-based iron ore options, where the volume cleared on the CME Group exceeded 2.3 million tonnes, more than 15% higher than the previous record level seen in March 2012. 

The high-water mark of 1 million tonnes cleared in a single day on SGX (first reached on 31 July 2012), became commonplace during the last couple of weeks in August, occurring no less than five times. When swaps and options volumes cleared on other exchanges are taken into account, there were eight days in August where over 1 million tonnes of iron ore derivatives were transacted basis TSI.

Meanwhile, iron ore spot prices slumped, with TSI’s benchmark 62% Fe fines price for Chinese imports CFR Tianjin port sinking to a 34-month low of US$88.70/dry metric tonne on 30 August, US$28.70/dmt (24.5%) lower than it opened the month. However, August ended with the price rising by US$0.70/dmt (0.8%) on the last day. This was the first rise since 14 August 2012; the average daily fall had been 2.2% since that date. 

August marked the fourth consecutive month-on-month fall, with TSI’s 62% Fe fines price averaging US$107.80/dmt during the month, down 15.7% on the July average and 27.0% lower than the average for April 2012. 

John Wright, broker, iron ore markets at GFI in London said “this year we are seeing a lot more physical players using iron ore swaps as a hedging instrument. The physical players are now consistently using these risk management tools to manage their price exposure, resulting in added liquidity and depth to the forward curve. We expect this increase in volumes to continue and as a result are now seeing more interest in both scrap and steel derivatives as well.”

TSI’s iron ore index is used for the settlement of swaps and options by five clearing houses worldwide, namely SGX (Singapore), CME Group (Chicago), LCH.Clearnet (London), NOS Clearing (Oslo) and the Indian Commodity Exchange (Mumbai). 

The total volume of iron ore swaps and options contracts cleared on these exchanges in August hit a new all-time monthly record of over 17.8 million tonnes, including over 2.3 million tonnes of options cleared on CME. 

Since their launch, more than 159 million tonnes of iron ore swaps and options have been cleared basis TSI, with a nominal value of over US$22 billion. This includes over 15 million tonnes of options, which have seen a strong growth in liquidity over the past year. 99% of all iron ore OTC contracts cleared since launch have used TSI’s prices for settlement. SGX has accounted for over 85% of the swaps cleared, whilst the CME Group has cleared nearly 90% of all iron ore options. 

SGX announced in August that it will be expanding its clearing services to include OTC iron ore options for the first time from 10 September. 

In other ferrous markets, Turkish scrap swaps and European hot rolled coil (HRC) steel swaps (both cleared at LCH.Clearnet basis TSI) also saw strong trading during August, with the month marking a new high for the number of scrap trades executed. The 12-month average transaction size for cleared European HRC swaps now exceeds 150 lots (3,000 tonnes).

Ends

The Steel Index (TSI) is a leading specialist source of independent iron ore, steel and scrap price information based on actual transactions. TSI is also currently developing coking coal reference prices.

Iron ore price indices are published daily at 12:00 GMT. Daily steel prices for Northern and Southern European HRC are published at 14:00 UK time and daily scrap prices for Turkish imports are published at 13:30 UK time. Weekly steel and scrap price indices are published every Monday and Friday respectively, with each price representing the average transaction price for the previous calendar week.

Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant iron ore, scrap and steel products. TSI’s index reference prices are then calculated using transparent and verifiable procedures.

TSI’s indices are widely used by steel mills, miners, traders, distributors and manufacturing companies worldwide as the basis for their physical pricing arrangements. TSI’s indices are also used as the industry standard in the settlement of ferrous financial contracts.

Singapore Exchange (SGX), LCH.Clearnet (London), CME Group (Chicago), NOS Clearing (Oslo) and Indian Commodity Exchange (ICEX) all use TSI’s iron ore index for settling their monthly cleared iron ore financial contracts. LCH.Clearnet also uses TSI’s prices for the settlement of two European hot rolled coil steel swap contracts and its Turkish imports scrap contract. In all cases, settlement prices are the average of TSI’s reference prices published in the expiring month.