SINGAPORE, May 24 (SMM) – The Singapore Exchange (SGX) will look to list a high-grade iron ore derivatives contract “very quickly” once it has completed due diligence, said William Chin, head of commodities at the bourse.
In an interview with SMM on the sidelines of the Singapore Iron Ore Forum on Thursday May 24, he said that market feedback has been very positive for such a contract.
“Coming out of the Iron Ore Week, one of the things we’re hearing very loud and clear is that there is demand for higher-grade iron ore [derivatives],” Chin said. “Beyond demand for the product, we will need to validate who will trade it, how do we market-make it, and how do we make it more liquid.
“Should we be able to tick those boxes, we’re keen to provide a tool the industry can use,” he said.
However, he added that the feedback may be skewed towards the positive “because no one comes to you and complains about a product that’s not already listed”.
SGX launched two lower-grade iron ore derivatives in March 2015 but the contracts have struggled to take off.
“The ability to gain visibility and price transparency to different grades of iron ore ultimately is very useful,” Chin said.
“However, the question comes back to the physical world – are people actually benchmarking the 58% Fe index, are there traders who want to trade the 58% Fe derivatives? And it appears that the answers to those two questions aren’t as positive or affirmative as we thought they were when we first launched it,” he added.
While there appears to be no growth story in iron ore in the physical market as China continues its push for electric arc furnace (EAF) steel production and scrap usage, Chin said “a very clear distinction between the physical and paper” markets needs to be drawn.
He believes that there is much room for growth in iron ore trading volumes on the SGX as the paper market in other commodities can be 25-40 times of their physical market. However, he is more concerned over the current lower volatility.
“If people don’t feel the need to hedge because prices are not moving, that becomes very dangerous because it downplays the necessity of hedging. If low volatility leads to a change in mentality, that is not very good,” Chin said.
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