Financial Times : Japan's steelmakers lock in iron price

Industry News 2010-06-30 13:59:16

Source: Financial Times (Through

By Leslie Hook in Hong Kong and Javier Blas in London 

Published: June 29 2010

The Japanese steel industry, the world's largest after China, has started to lock in iron-ore prices through the use of derivatives in the clearest sign of the development of a financial market around the commodity used in steelmaking.

The use of iron-ore swaps to hedge volatile prices comes after miners and steelmakers ditched the 40-year-old system of annual contracts this year, replacing it with quarterly contracts linked to the volatile spot market.

Mitsui, the Tokyo trading house or sogo shosha , said it had signed the country's first ore swap with Credit Suisse. The bank confirmed the deal.

The swap allows Mitsui, which acts as a middleman between iron-ore miners such as Vale of Brazil, Rio Tinto and BHP Billiton and the Japanese steelmakers, to hedge the price of the commodity, avoiding the volatility of quarterly contracts.

Spot iron-ore prices hit a 2-year peak of $182.10 a tonne in mid-April, but since then they have dropped 23 per cent, to reach $139.70 yesterday.

Iron-ore prices are still up nearly 85 per cent year on year on the back of strong demand from China. For Mitsui the deal is "a test trade in the iron-ore swaps market", said Tomohiro Saeki, general manager at the company's commodity trading and risk management division.

He declined to give details of the swap, but industry sources said it had been for 10,000 tonnes of iron ore per month for the second half of 2010.

"Lots of financial institutions and investment banks are coming into the market and the producers are also very interested," Mr Saeki told the Financial Times in an interview from Tokyo. "All of the steel mills are interested in these swap markets."

The deal signifies the first steps by the traditionally conservative Japanese traders and steelmakers in what is a potentially huge market for iron-ore hedging products. Bankers said Mitsui and its larger competitor Mitsubishi, Japan's largest sogo shosha, were in talks about significantly larger ore swaps hedges for next year. The development of the iron-ore swap has been slow until now, with most iron-ore swap deals conducted in London and not involving consumers such as trading houses or steelmakers.

But the potential market for iron-ore swaps is huge, bankers and analysts said. Iron ore is the world's second-largest commodity by volume after oil.

So far, the value of its financial, or paper, market is tiny, at about $300m, but brokers and traders forecast that the iron-ore swaps volume will grow to about $200bn by 2020.

Raymond Key, global head of metals trading at Deutsche Bank, said all the factors were "in place for the volume [of iron ore swaps] to literally explode".Bankers hope the move by Tokyo traders and steelmakers would prompt others to follow. Mr Key said China's large mills had become more interested in swaps after encouraging comments from the China Iron and Steel Association


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