There are a few hard commodities that doesn’t have a futures market and until now iron ore was one of them. But unlike diamonds which also doesn’t have futures, iron has more strategic importance in the industrial world.

Iron ore is the primary raw material used in the production of steel –
and the world’s second largest commodity by value, after crude oil.
Because iron ore has historically traded under long-term fixed price
contracts between steel mills and mining companies, iron ore is the
world’s largest commodity without a significant derivatives market.

Intercontinental Exchange (ICE) is all set to change the way iron ore
will be traded as it launches iron ore swaps contract on December 2 in
association with Platts. ICE OTC cleared iron ore contract based on the
well-regarded Platts Iron Ore Index. The ICE Platts Iron Ore Swap 62%
Fe (metallic iron) contract will be available for clearing on ICE Clear
U.S.

“As a major input to steel production, iron ore is essential to the
global economy and is one of the largest commodities today without a
fully developed derivatives market,” said Mike Davis, Director of
Market Development, ICE Futures Europe. “We have designed the contract
to meet the requirements of participants in the iron ore and steel
industries so that they are able to manage price risks around steel
input costs, just as they have long been able to do with other factors
of production such as oil and coal.”

Iron ore is a mineral with metallic iron (Fe) content. High grade iron
ore contains at least 60% Fe content, and the industry has adopted the
62% Fe specification as a standard benchmark for derivative
transactions. The ICE Iron Ore Swap is based upon the most commonly
traded grade of iron ore, referencing 62% Fe content delivered by sea
to China. The contract will be cash settled against a daily index price
published in Platts Metals Alert (PMA) under the heading ‘IODEX: Iron
Ore fines 62% Fe CFR North China’

Platts introduced to the global marketplace the world’s first daily
price assessments of seaborne iron ore in June 2008. “At that time,
Platts recognized the importance of a fast-evolving spot market in iron
ore, one of the largest commodity sectors globally,” said Karen McBeth,
editorial director of the Platts metals group. “After their
introduction, our iron ore assessments quickly became the most
important indicator of value at a time when the industry was changing
its long-term contractual practices,” she added.

Platts’ price assessments are underpinned by a robust methodology of
guidelines and quality protocols. Its IODEX assessments are based on
all-day market monitoring and data collection of transactions, bids,
offers and other information from market participants during the Asian
business day until the market close at 18:30 Singapore time. The data
is normalized and a neutral origin 62% Fe content iron ore fines price
assessment is published immediately in Platts’ Metals Alert (PMA), a
real-time metals price and news wire service. The data is published
again at the end of the U.S. trading day in Platts’ Steel Markets
Daily, an online and print publication that offers news, market
commentary and price information aimed at the steel, construction and
auto industries as well as commodities-focused money managers
worldwide.

“The Platts daily IODEX assessment of iron ore delivered to China has
not only received wide acceptance as an accurate and independent
benchmark for pricing physical cargos, but has facilitated the very
development of transparent price discovery in this burgeoning market,”
noted Francis Browne, director of steel and iron ore at Platts. “With
ICE Clear’s launch, the financial community will now be able to benefit
from Platts’ long experience in spot market valuation and have another
tool to help address risk mitigation.”

The global spot market for iron ore fines, a key steelmaking
ingredient, is dominated by China’s import market. China imported 471
million metric tons in 2008 and is on target to import 630 million
metric tons this year to feed its growing steel demand, which is highly
correlated to its economic growth.

Platts has been assessing prices in the metals markets for more than 35
years, drawing on the tradition of its parent company, The McGraw-Hill
Companies, which has covered the metals markets since 1930.

Since its June 2008 introduction of daily seaborne iron ore
assessments, Platts has rapidly expanded its offering for the iron ore
market, which now includes price assessments for iron ore grades 62% Fe
and 63.5/63% Fe, high-grade 65% Fe and a low-grade 58% Fe, as well as a
daily 1% per Fe content differential for 60-63.5% iron ore fines to
help clarify the normalization process. Platts also publishes daily
freight netbacks based on the most liquid routes to five basis origins.
A first-ever forward curve assessing the daily bid/offer and trade
values in the over-the-counter swaps market for iron ore has also
recently been launched. (Courtesy: PRNewswire)

Source: PRNewswire

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