Cash-settled contract may be benchmarked to TSI
* Exporters, traders unlikely to rush in to hedge
* Chinese, overseas firms have shown interest-ICEX (Adds quotes, details, background)
By Siddesh Mayenkar
MUMBAI, Jan 28, 2011 (Reuters) - India's planned iron ore futures contracts are likely to be settled in cash initially and would be linked to internationally acceptable prices, an official said on Friday, but potential players say they would not rush in to hedge on the platform until there is ample liquidity.
Singapore is also looking at a cash-settled futures contract which the Singapore Mercantile Exchange is hoping to launch in the second quarter, in a race with India to establish the world's first futures market for the steelmaking ingredient.
"The contract would closely track acceptable benchmarks like the TSI (The Steel Index)," an official from the Indian Commodity Exchange (ICEX) told Reuters on condition of anonymity.
TSI .IO62-CNI=SI is one of three key providers of iron ore reference prices which global miners Vale , Rio Tinto and BHP Billiton use in setting quarterly contract rates.
SMX, controlled by India's Financial Technologies , was looking at benchmarking its futures contract against the iron ore index of another data provider, Metal Bulletin .IO62-CNO=MB.
India's commodity market regulator, Forward Markets Commission, on Tuesday approved plans by ICEX and the Multi Commodity Exchange (MCX) to launch four iron ore futures contracts. ICEX said it was looking at launching in a month's time.
India is the world's third-biggest iron ore exporter after Australia and Brazil, although its shipments have dropped for a sixth straight month in December because of an export ban in its southern Karnataka state. India normally exports around 100 million tonnes of iron ore annually of which around a quarter comes from Karnataka.
But India's iron ore exporters said liquidity would be a key consideration before they hedge on the futures platform.
"It's a fear that prices may not fluctuate on an intra-day basis, which may put speculators off and take away liquidity from the market and hamper corporate participation initially," said another source with ICEX.
Futures contracts would be in addition to the existing forward swap contracts, launched in 2008, being offered by bourses from Singapore to the United States and Europe to prod steelmakers into hedging price risks after the industry moved to a more flexible quarterly pricing system last April after the collapse of a 40-year-old annual benchmark system.
"We wonder if we would hedge right away or wait to see how soon liquidity enters the market," said Rahul Baldota, executive director with iron ore exporter MSPL, which ships most of its annual output of 2.5 million tonnes to top buyer China.
"We hope liquidity would come in over a period of time after options come on board."
India is awaiting approval from the lower house of parliament to start options contracts, which are likely to lure corporate participants and boost liquidity.
"Few overseas firms have shown interest, and they plan to open a subsidiary here so that they can procure, hedge and export," said Sanjay Chandel, chief executive at ICEX.
The absence of foreign players in Indian commodity bourses is a predominant concern which could further limit liquidity, and restrain its influence as a price setter for the seaborne iron ore market worth around $100 billion in 2010.
India currently bars foreign funds from its commodity exchanges.
"India would take time, say another two years, to become a globally acceptable benchmark and could be much more easier after the entry of foreign players," said ICEX's Chandel.
Chandel said ICEX plans to start roadshows next month to promote the contracts. (souced: reuters)