Iron ore swap volumes rise 150% in 2012: FIS

LONDON (Scrap Monster): Iron ore options market is witnessing hectic activity as industry looks at ways to hedge against the increasing volatility in iron ore prices. The recent jump in iron ore swaps trading activity has led to a rapid expansion of iron ore options volumes, according to Freight Investor Services (FIS).

Underlying iron ore market volatility came close to 50% towards the end of 2011 compared to less than 7% at the start of last yea. So far in 2012, iron ore swaps volumes at 8.7m tonnes, are 150% higher than in the same period of 2011 at 3.5m tonnes, FIS said in a report.

So far in 2012, 2.1m tonnes of iron ore options were traded - more than double December’s volume, with FIS’ new iron ore options team of Salman Majid and Saurab Joshi noting strong interest in this emerging derivative.

John Banaszkiewicz, managing director of Freight Investor Services, said: “The volatility in iron ore is here to stay and even when levels are lower, the price movement makes swaps and options tools that miners, traders and end-users should be making more use of. Mining companies can protect their downside risk buying Cal13 puts in the market at $115 for a $13.75 premium while a steelmaker can buy a Cal13 call at $140 for $12, these are tools that everybody should have in the armoury.”

Data from the UN Conference on Trade and Development* estimates that at least 500m tonnes of iron ore production will enter the market between last summer and the end of 2013. Since the start of 2011, TSI assessments put the delivered price of 62% Fe iron ore fines into China in a range between $117 and $192/tonne. That $75 spread puts the potential 500m extra tonnes of production at a price variance of $37.5 billion, risk that could be hedged by mining companies using iron ore swaps and options.

Salman Majid, cross-commodity options broker at FIS said: “With physical iron ore contracts almost all now priced on a spot or index-linked basis, more and more end-users will need to look at protecting their margins on the underlying commodity. Options will be very interesting in 2012 as the increased liquidity on the underlying swaps gives traders a great opportunity to hedge direct physical tonnage.”

An option is a contract that gives the buyer the right, but not the obligation, to buy (a ‘call’ option) or alternatively sell (a ‘put’ option) the underlying instrument (a swap) at a specified price in the future.