The spot market trade in iron ore will continue to grow but will not replace term contracts, says Kamal Naqvi, Head of Hedge Fund Coverage for Credit Suisse’s Commodities Group.
“Over time we’ll see this as part of the process of further development of the iron ore market, much as we’ve seen in a number of the other commodity markets,” he says.
“It will allow all users greater ability to manage their price risks over time.”
Mr Naqvi, a speaker at the EU Iron Ore Insights Conference in Berlin on 30-31 September, says in an interview that the market potential is huge.
“You’re talking about a 300 to 400 million tonne spot iron ore market (with) the possibility of some of the term contracts moving to some sort of tradeable process. So you’re talking about a massive physical market, probably the largest physical commodity market left that’s not traded.”
Mr Naqvi says that although the Chinese steel mills are the biggest institutional users of the spot market, there is a huge amount of interest “from our colleagues who work with us in Asia”.
“I think we’ll see them very active users as they are in a number of the metals markets.”
Mr Naqvi says the spot market over the last five or six years has been driven not by BHP Billiton or Rio Tinto but primarily by Indian iron ore producers dealing directly with a raft of Chinese steel mills.
“In recent months both the big two Australian producers have indicated their intentions and have started selling on a spot rather than an annual term basis to a number of these Chinese steel companies.
“We’ve seen that interest grow from a range of players to see whether or not they can reduce some of the price risks they take on just by being subject to the floating spot price through trading options available to people in other markets like copper and oil.
“What we’ve done at Deutsche Bank and Credit Suisse is start the process to allow people– whether they be sellers or buyers – to determine what price level will work for them in what period.”