Leading steel makers, ArcelorMittal and Tata Steel are
set to enter into iron ore derivatives, marking a crucial milestone in
developing trade for the mineral, which is the world's second-largest commodity
after oil.
Although the steel makers continue to say publicly
they do not use such products, sources said ArcelorMittal hedged a block of
iron ore trades in September, while Tata recently decided to use derivatives on
a small scale in 2015.
Both steelmakers declined to comment, but have
previously said they oppose iron ore and steel derivatives on the grounds that
such instruments can give speculators undue price influence.
Iron ore derivative volumes are set to reach some
550 million tonnes this year, having roughly doubled every year since their
launch by the Singapore Exchange in 2009.
Steelmakers and merchants in China, which is by far
the world's biggest iron ore consumer, embraced the products.
Now, with the cautious entry of ArcelorMittal and
Tata, a trend could be set in motion whereby smaller rivals follow suit,
speculators jump in and volumes soar even further.
The popularity of iron ore derivatives coincided
with an explosion in spot market volumes around five years ago, when the market
moved from annual benchmark pricing to shorter-term contracts based on daily
indices. That raised price volatility and the need by industry participants to
better manage risk.
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