LME to launch iron ore futures to meet hedging demand
The London Metal Exchange will launch futures for iron ore and other steel raw materials to cater to growing demand from steel plants and other customers for hedging price volatility resulting from gyrating steel prices in China.
Last November, LME launched two new ferrous contracts, LME Steel Scrap and LME Steel Rebar. To complement existing products, the exchange will also consider listing futures for iron ore, coking coal and hot-rolled coil, said CEO Garry Jones.
With retail and other investors' money flooding into iron ore futures contracts listed on China's Dalian Commodity Exchange, these futures contracts are beginning to affect spot prices, too. Iron ore prices gyrated wildly from late April to May largely due to speculative money.
Steel plants around the world are beginning to look to price volatility risk amid uncertainty over the outlook for raw material prices.
Singapore Exchange (SGX), which launched iron ore futures in 2013, saw the number of settled iron ore futures in May jump 140% on the year to about 900,000 contracts, or 90 million tons. Japanese trading houses, as well as Chinese steel plants, are actively engaged in futures trading to hedge price volatility.
LME's entry "could boost arbitrage trading to take advantage of time and price difference between regions and expand overall futures markets," said an iron ore trader at a major Japanese trading house.
Exchanges are focusing on steel partly because raw materials are now traded on the spot market. Iron ore and coking coal have been mainly traded on a long-term basis, but the spot market for these materials has been expanding rapidly of late.
Robin Griffin, a senior coal analyst at British research company Wood Mackenzie, said spot trading now accounts for 55-60% of total coking coal trading. Iron ore is essentially traded on the spot market in China, the world's largest importer.
Competition will likely intensify among exchanges for steel, which has growth potential. LME, which has a strong presence in nonferrous and other metals, could also become a strong rival for SGX and other exchanges in the steel market.
Source: Nikki.com