UBS has extended the activities of its exchange-traded derivatives commodities team in Singapore to include iron ore – which is used to produce steel – and related commodities, such as coking coal and steel.
For the time being, the team is servicing companies with exposure to iron ore, steel and freight, with banks providing pricing and liquidity. But it hopes that fund managers too will use the capability in the future.
Besides offering established clearing activities, the team has been beefed up to meet growing demand for over-the-counter and exchange-listed/traded commodities.
The section is headed by Terence Noe in Singapore. In London, the team is headed by David Cunningham and supported by Mark Hubbard for iron ore, with Timothy Woodward, who is global head of commodities, overseeing operations.
The Singapore team includes Mark Langley (who joined UBS in May from London Dry Bulk in Hong Kong), Ed Thwaites and Jingle Chong. Thwaites joined in June having worked at commodity broker Sucden Financial for three years.
UBS has launched a new execution service that will facilitate trades between buyers and sellers. The main participants now are major iron ore and steel producers and financial institutions.
Singapore Exchange (SGX) was the first exchange in the world to launch the standardised 62% iron ore contract last April, and from initial monthly volumes of 200,000-300,000 tonnes in the early stages, volumes have increased steadily to an average of 2 million tonnes a month.
It is believed that the coming months are likely to see coking coal contracts listed. Moreover, the commodity is said to be moving away from traditional benchmark pricing towards a regime with values that are more reflective of actual supply and demand.
Asian iron ore traders are growing in number, mostly in Australia, China and Singapore. They are seeing opportunities as prices are more fluid now than ever before.
The new pricing system for iron ore was prompted by Australian miner BHP Billiton as a move away from benchmarking. The banking world subsequently seized on the opportunity to develop business and provide liquidity.
The moves are the result of radical changes in the pricing of iron ore. In the past, all contracts for that material were generally agreed on an annual benchmarking system between the large miners – such as BHP Billiton, Rio Tinto and Vale – and major steel producers.
The iron ore market is in a dramatic state of change, says Sydney-based Tom Price, a UBS analyst.
The origins of recent developments go as far back as 2003 when China made its first real impact on the pricing of the commodity. In that year, China's representatives demanded a leading place at the negotiating table. Up to that point, Japanese manufacturers and two large miners, BHP Billiton and Rio Tinto, had fixed the price annually.
“The Chinese were acrimonious at negotiations in 2003 and no one had really seen anything quite like it,” says Price. They were keen to reduce prices and no longer wanted to play second fiddle to Japanese corporations, which had dominated deals since the 1960s.
Also, after 2003, production of iron ore in the Asia-Pacific region was expanding to include new small to medium-size producers, such as Fortescue Mining and Sino Steel.
Then came a bombshell this year. From April, Marius Kloppers, chief executive of BHP Billiton, secured quarterly pricing for iron ore for the first time. “And Marius did this in both iron ore and met-coal this year,” says Price.
Subsequently, for the first time, UBS began forecasting quarterly prices for iron ore, and it is bullish.
Despite reports of seasonal waning in manufacturing, China is still in the midst of developing enormous infrastructure programmes, says Price, and iron ore is a vital raw material for this.
Besides exchanges, OTC brokerages are also continuing to boost activity in the iron ore-, coal- and freight-related product space, as the demand for such commodities often outstrips supply.
There has also been increasing pressure from regulators to manage risk on trading books differently. Regulators have been encouraging buyers and sellers to use third parties (such as exchanges) to clear trades on a daily basis. This moves away from bilateral accounting for commodity trades, which was commonplace until a year or two ago.
In 2008, UBS relocated Noe from London to Singapore to take up the post of Asia-Pacific head of exchange-traded commodity derivatives.