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Iron ore is touted as Asia’s ‘first global commodity’ amid shift
The largest clearer of iron ore derivatives kicked off a contract for high-grade material on Monday, describing the old-time staple as Asia’s first global commodity and seeking to benefit as China’s unprecedented battle against air pollution spurs demand for better-quality inputs.
Singapore Exchange Ltd’s contract for 65% ore adds to products for the benchmark 62% as well as lower grades. The new offering will be cashsettled against an index that tracks shipments into the port of Qingdao, where the mineral is a key ingredient for the nation’s vast steel industry.
The global iron ore market has become more fragmented over the past three years, with greater demand for higher-quality material and wider spreads between grades by content and purity. That’s been driven by the harsh clean-up campaign in China, sparking a flight to better-grade material that’s cleaner and more efficient and aiding miners including Vale SA. While a selloff last month narrowed some of the differentials, they remain wide.
Given the market’s shift, “the advent of a high-grade derivative contract is a welcome development,” said Andrew Glass, head of iron ore trading at Anglo American Plc. The miner believes the new product “will enable more accurate risk mitigation for the more volatile high-grade products,” he said.
The iron ore market revolves around Asia. The largest user is China, which accounts for half of global steel supply, while Australia is the top national shipper, underpinned by output from Rio Tinto Group and BHP Group. Brazil’s Vale is the biggest single miner, and the material is consumed worldwide.
“Iron ore has become Asia’s first truly global commodity, increasingly following in the footsteps of the oil complex in terms of size and economic importance,” said Michael Syn, head of derivatives at SGX. The high-grade contracts give “tools to bridge domestic pricing in China – iron ore’s most important market – to an international benchmark,” he said.
In Asia, iron ore derivatives are also traded by China’s Dalian Commodity Exchange. In May, the mainland exchange opened up its existing yuandenominated iron ore product – which is an important market for local retail investors, as well as mainland mills and traders – to overseas investors.
There’s no consensus on whether the wide spreads between grades will remain a feature of the market, although miner Rio Tinto said last week it expects the gap to persist, albeit with some seasonal volatility. Citigroup Inc has said the differentials will narrow in the next three to five years as the flight to quality in China was a one-off event, according to a report.
The new product will a provide a valuable risk-management tool for mills and high-grade miners, SGX Head of Commodities William Chin said. It’ll also help participants looking to express a view on the duration and intensity of winter output curbs, according to Chin.