Why LME Iron Ore, Coking Coal Contracts May Be Hasty

Hong Kong Exchanges and Clearing Limited (HKEx)’s CEO Charles Li has been quoted in Reuters as saying he wants to expand the London Metal Exchange’s product offering beyond base metals to include iron ore, coking coal and iron ore shipping.

China is the world’s largest consumer of all three steelmaking materials, and as such, HKEx’s Asian clients may indeed be the early adopters of such products. What form the LME’s contract will take it is far too early to say, but traditionally the LME contract has been physically deliverable, unlike financially settled contracts on US and Asian exchanges.

There are already some firmly established contenders and the LME will face tough competition.

The Singapore Exchange (SGX) has become the dominant global platform for clearing iron ore swaps contracts, and although it got off to a slow start, volumes are ramping up dramatically as traders seek to hedge their positions in a falling market. Trades cleared in August were more than triple the amount from a year earlier, as well as being more than 40 percent higher than trade volume in July.

In addition, the CME Group, London Clearing House (LCH.Clearnet), NOS Group and ICEX (Indian Commodities Exchange) all offer cleared swaps based on The Steel Index’s (TSI) iron ore transaction data, providing traders, consumers, producers and speculators with multiple options.

The LME will have to solve the thorny issue of restricted delivery from LME-approved warehouses before consumers would consider using the market for raw materials such as iron ore or coking coal.

Faced with the option of a financially cleared swaps contract and readily available port stocks, why would a consumer risk using the LME if there were the same delays as those faced by aluminum or zinc consumers trying to access physical metal from an LME warehouse?

That may be a more pressing challenge for Mr. Li and HKEx to address than touting new products for the LME to handle.

By Stuart Burns