Iron ore swaps attract more banks and steel buyers - Analysts

Wednesday, 27 Jul 2011

Reuters reported that the iron ore swaps market has attracted an increasing number of banks and financial firms as well as growing interest from automakers and other steel buyers, even while most steelmakers are reluctant to use hedging instruments.

Deutsche Bank and Credit Suisse have been active in the iron ore swaps market since it started in 2008-09, followed a few months later by others such as Citigroup, JP Morgan, Morgan Stanley and Macquarie.

The iron ore swaps market is still very small compared with a physical market of about 1 billion tonnes a year of seaborne material, but it is growing quickly.

Mr Habib Esfahanian iron ore derivatives trader at Citi said that "You can see, bit by bit, that many banks are now involved to some extent. I think it is only natural that the combination of client interest and volatility in the product got traders interested."

Goldman Sachs started to trade iron ore swaps earlier this year.

Mr Paul Temple head of steel derivatives trading at French bank Natixis said that it is already trading steel derivatives and will start trading iron ore swaps in the next few weeks.

Other banks such as BNP Paribas that were only dipping their toes in iron ore derivatives until last year have stepped up their efforts.

Mr Mikko Rusi, BNP Paribas head of EMEA metals sales, said that "We have a large number of clients in this sector and we are reacting to a number of enquiries from our customers. Clearly we see that the iron ore and the steel market, if you look at the size of the physical market, is very big and represents a good business opportunity for banks."

Mr Abe Ulusal, a trader at Mitsui Bussan Commodities, said that "Iron ore producers and trading firms are more active, and steel end users would like to get involved."

Brokers and traders said steel mills, especially in China, are warming up to iron ore derivatives but no large mill has openly backed this market so far.

Mr Stephane Giroit ferrous metals sales at BNP Paribas said that "As of today, steel mills are not the most active party in this market, but some of them are starting to look."

Mr Colin Hamilton analyst at Macquarie said that "Automakers would rather hedge themselves, but they are waiting for the market to mature. The market can proceed without steelmakers, but it's obviously more challenging. The commoditization of steel is always going to be an issue for steelmakers."

(sourced from Reuters)