The volume of iron ore swaps cleared on the Singapore Exchange (SGX) in August surged 42% on July (itself a record month) to 14.88Mt. The level of open interest on SGX also passed a notable milestone, exceeding 10Mt (20000 lots) for the first time on 30 August.

It was a similar story for The Steel Index (TSI) iron ore options, where the volume cleared on the CME Group (Chicago) exceeded 2.3Mt, more than 15% higher than the previous record level seen in March 2012. 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.

The earlier high-water mark of 1Mt cleared in a single day on SGX (first reached on 31 July 2012), has become commonplace during the last couple of weeks ? in August, it occurred 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 1Mt 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, a drop of $28.70/dmt (24.5%) in the month. However, August ended with the price rising by $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 17.8Mt, including over 2.3Mt of options cleared on CME.

Since their launch, more than 159Mt of iron ore swaps and options have been cleared basis TSI, with a nominal value of over US$22bn. This includes over 15Mt 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 (3000t).

Source: Platts