Metal Bulletin to launch iron ore index for hedging

MONTE CARLO, May 13 (Reuters) - Publishing and research group Metal Bulletin plans to launch an iron ore price index in the third quarter that can be used as a basis for hedging derivatives, a company executive said on Tuesday.

The index, based on spot landed prices in China, will provide an additional mechanism alongside traditional annual contract price negotiations, Metal Bulletin Managing Director Raju Daswani told the group's Iron Ore Symposium in Monte Carlo.

"This aims to help and address some of the anomalies that exist in the marketplace," he said. These include the difference between contract prices and spot prices, and freight charges.

The market should be broadened with more liquidity as additional players enter the market, including those who want to hedge their exposure to iron ore as well as investors and speculators, Daswani said.

The index will be based on actual deals and is due to be published on a weekly basis. Metal Bulletin is well placed to formulate an index since it already publishes iron ore prices from China based on the spot price, he added.

Derivatives based on the index are envisaged as cash-settled swaps, not futures with physical delivery, said Guillaume Perret, a consultant working with Metal Bulletin to set up the index.

Most of the world's iron ore is sold through contracts with the price set through annual negotiations for the 12 months from April.

Traditionally, the first settlement between a producer and a steelmaker sets a benchmark price for the industry, but this year miners Rio Tinto (RIO.AX: Quote, Profile, Research) (RIO.L: Quote, Profile, Research) and BHP Billiton (BHP.AX: Quote, Profile, Research) (BLT.L: Quote, Profile, Research) have failed to go along with price hikes of 65-71 percent achieved by Brazil's Vale (VALE5.SA: Quote, Profile, Research) and are pressing for higher rates including a freight differential.

There have also been calls for contract prices to better reflect spot prices, especially recently since spot prices have surged due to shortages amid heavy demand from China.