COLUMN-China opening may spark iron ore to become more like crude oil – by Clyde Russell (Reuters U.S. – May 25, 2018)

SINGAPORE, May 25 (Reuters) – In the relatively short space of the past decade the paper iron ore market has grown from virtually nothing to exceed the physical market, but now the industry is grappling with what comes next.

While the growth in iron ore futures and exchanged-cleared swaps has been impressive, iron ore is still a long way behind other commodity markets, such as crude oil and some agricultural products, where paper trade exceeds physical by large multiples.

There are two main paper markets for iron ore, the well-established Singapore Exchange (SGX) futures and swaps, and the Dalian Commodity Exchange (DCE), which up until now has largely catered for Chinese domestic investors.

The SGX is viewed largely as the professional market, used by miners, traders, finance houses and steel mills to hedge risk and to some extent discover prices. However, the main SGX contract is financially settled against an index, in this case provided by the Steel Index, one of the established players in the market.

The absence of a physically delivered future may be viewed as a weakness of the SGX, notwithstanding the general respect the market has for the validity of the index price.

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