China Daily cited Mr Li Yizhong minister of industry and information technology as saying that major steelmakers including Baosteel to upgrade their product portfolios at a meeting on Monday in Dalian. He also told the companies to cut emissions a key task for the industry this year.
Industry sources said the iron ore swap market is expected to grow leaps and bounds in volumes after the pricing of the commodity shifted from the traditional benchmark system to market related prices.
Though producers and mills are still the key players in the swap market, it also has a middleman as the key player. The middleman effectively hedges the price of an undisclosed volume of iron ore against the backdrop of considerable volatility in the price. The swap market is still at a nascent stage, but experts predict it will surpass the spot market over the next two or three years.
Mr Rory MacDonald an iron ore analyst from The Steel Index said iron ore swap volumes account for 5% of the spot market at present and could triple or quadruple in the next three years, if China allows the use of derivatives.
The nation has strict rules in place with regard to derivatives trading by State-owned enterprises. The steel lobby China Iron and Steel Association and China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters have in recent times said they will not allow steel mills to be mired in iron ore swaps. But their stance on swaps is vague indicating that the steel lobby is considering a more flexible approach in the future.
Mr Shang Shanhua secretary general of CISA said "The question is complicated and it cannot be concluded by just one sentence."
Mr Michael Gaylard strategy director of Freight Investor Services a leading broker said "We do see the value of iron ore swaps in hedging volatility and manage risk. He said that though CISA is not favorably disposed towards swaps, many Chinese players are privately involved in the swap market and are maintaining a low profile. There are around 10 to 20 private steel mills and around 10 to 20 traders operating in the iron ore swap market through the Singapore Exchange.”
Mr Michael Gaylard said state owned companies have also expressed their interest in swaps and have sought more information on the mechanism. He said that at present nearly 2.5 million tonnes of iron ore is being traded every month in the swap market this year compared with 200,000 tonnes per month last year. China accounts for nearly 15% to 20% of the trade.
He added that "The numbers are growing fast. We still have a long way to get the products needed from large steel mills to hedge iron ore exposure. The market is still immature. But iron ore swaps are developing far more quickly than any other commodity."
He also said "It normally takes four or five years for other commodities like coal or oil to get to that stage while it took only 19 months for iron ore."
Mr MacDonald said till May, the value of iron ore swaps has been around USD 2 billion.
Deutsche Bank AG started offering iron ore swaps with Credit Suisse in May 2008. Vale SA, Rio Tinto Group and BHP, the three big iron ore suppliers, this year scrapped the 40 year tradition of setting prices annually in favor of quarterly contracts.