* Major iron ore derivatives market seen taking shape
* Volatile prices pressure producer-consumer deals
By Barani Krishnan
NEW YORK, Dec 3 Brazil's Vale SA, the
world's second largest mining firm, said on Monday it expects a
huge derivatives market in iron ore to eventually take shape as
players seek hedging instruments to minimize risk from
increasingly volatile prices.
"I believe a big financialization of the iron ore market
will be inevitable," Jose Carlos Martins, who runs the iron ore
business for Vale - the world's single largest producer of the
commodity - said at a news conference in New York.
The price of iron ore , a key ingredient for
steel, fell by a third in China's spot market in August before
recouping all of its losses over three months.
The stormy price action was a result of a supply deluge,
followed by a surge in demand in China, the world's largest
market for iron ore.
"The Chinese have a very big risk appetite towards iron ore
because they consume 65 percent of production. Other clients of
iron ore who cannot work with this volatility will have to
resort to financial instruments to guarantee market stability,"
"So, we see an increasing trend in the market to use more
financial instruments or derivatives to try and hedge away risk.
This will be much bigger in the European and Japanese markets."
The spot price of iron ore, now hovering around $115 a
tonne, is still below levels that some producers find
profitable. In August, the price fell under $89, below the
production cost for at least 30 percent of the world's
producers. Vale forecast a price range of $110 to $140 in 2013.
For decades, iron ore sales were decided by an annual
benchmark price system negotiated between producers and
consumers, with contracts for as many as 10 to 15 years common
in a market with predictable price growth, Martins said.
The advent of huge supply-demand from China's booming
economy brought unprecedented volatility to the commodity,
generating a spot market for iron ore that put pressure on
producer-consumer negotiated contracts.
China's top economic planner said in October that the
country should move ahead with plans to launch futures contracts
to help firms buying the steelmaking raw material manage price
risks. Three exchanges - two in India and one in Singapore - are
currently trading iron ore futures although liquidity has been
thin since trading kicked off last year.
Vale has tried to preserve the negotiated contracts system
with its customers by making price adjustments every quarter,
but even that seemed inadequate at times in a gyrating spot
market, Martins said.
"We believe the future of iron ore will be on deals based
more than ever on the spot market, with contract terms of one to
three years. Clients will not want long-term contracts," Martins
While Vale was closely monitoring the market's move towards
greater securitization, it was not playing any leading role in
bringing about a change, Chief Executive Murrilo Ferreira said.
"There is no study or plans at Vale to be an active player
in the iron ore derivatives market," Ferreira said.
"The pricing system or levels with which clients became
comfortable to hedge is not a process that happens overnight. I
saw it in copper, I saw it in aluminium. It's really a long-term