Iron ore derivatives market to reach 100 million tons this year

The global market for derivates based on iron ore could expand to reach 100 million metric tons in 2012, said data provider The Steel Index (TSI).

In 2011, 58 million tons of iron ore financial contracts were cleared globally, according to TSI, one of several information providers that offers indexing for iron ore prices. This is more than double the volume seen in 2010, during which 21.1 million tons of iron ore derivatives were cleared.

This year, just short of 7 million tons of iron ore derivatives were cleared in January alone, a level that, on an annualized basis, would see 2012 growth of 40%, said TSI as reported by Fincad.

"We expect 2012 to be the year when we see the cleared volumes of iron ore derivatives exceeding the 100 million metric ton mark," said Tim Hard, director of steel and scrap at TSI. "The unknown is how much further it goes than that," he added.

An iron ore swap is a cash-settled derivative contract that involves buying or selling at a fixed price against a floating price, like an index. Swaps can be used by mining companies, steel producers and other market participants to hedge against volatility in the physical iron-ore spot market.

Options, on the other hand, give buyers the right, but not the obligation, to buy or sell commodities at an agreed price during a specific period of time.

While the iron ore swap market was pioneered by Credit Suisse (CS) and Deutsche Bank AG (DB) in 2008, the iron ore options market only really got underway in the second half of 2011.

The latter saw strong growth in 2011, and 6.5 million tons of iron ore options have been cleared to date, said TSI.

"The market is growing very fast" said Jos Evans of Red Ops, a specialist broker of options and swaps. "We've seen more physical clients and a lot more interest coming from all quarters. We're definitely at the beginning of the curve," he added.