Reuters reported that Switzerland"s bank Credit Suisse expects trading volumes at its over the counter iron ore paper market to more than double to over 15 million tonnes by end 2009.
Mr Kamal Naqvi head of fund coverage of commodities at Credit Suisse said that uncertainty in the global economy and increased volatility in iron ore and steel prices and volumes are likely to encourage steelmakers to do more business on the spot market.
London based Mr Naqvi said that "It is in the steelmakers" advantage to access the spot market at the moment as they can purchase at a price and volume that is profitable. The benefit clearly is flexibility. The spot iron ore market has allowed people to maintain margins and adjust import volumes and timing in a way that the benchmark system does not allow."
Mr Naqvi said that "If you"re a steelmaker looking to negotiate your benchmark contract for 2009/2010, you are unlikely to be certain on the volume of steel you will produce or the likely finished steel price over the year. So, the volumes contracted for 2009/2010 may be lower than in recent years, with any upward surprise in volume being met by spot purchases.”
He said that "Over the next 6 to 18 months, the outlook is going to be very volatile. That’s a very difficult environment to maintain an annual contract price and volume and I think that"s increasingly being recognized."
Mr Naqvi expects the trading volumes in its OTC paper market for iron ore to jump to above 15 million tonnes to 20 million tonnes from around 7 million currently. He does not expect the spot market or index based pricing mechanisms to replace the traditional contract system, but said that the old system has taken some big hits this year. He said referring to 2008 benchmark negotiations that "Participants on both sides of the annual negotiation system have broken with tradition in some form last year. It is hard not to see that being a positive for the credibility of some alternative approaches."
Mr Naqvi said that should Chinese mills consider signing anything less than a yearly contract this would be a positive for the potential use of the OTC forward market.
Deutsche Bank and Credit Suisse"s OTC market launched last May, offers cash based swaps, which are settled against published indices Metal Bulletin, Steel Business Briefing and Platts against spot physical iron ore, delivered China.