Singapore Exchange aims for steel contracts in the next 12 months

The world’s top clearer of iron ore derivatives, Singapore Exchange Ltd, is expanding its portfolio with plans to launch steel contracts in the next 12 months as China churns out a record amount of the alloy. The SGX is looking at a range of products, including reinforcement bar, hot-rolled coil and scrap, its head of commodities William Chin said in an interview.Having completed a draft proposal, the exchange is working on specific indexes and products and looking closely at China-referenced pricing, he said. The exchange’s move comes as China continues to open up its global commodity futures markets to global investors in a bid to boost its influence on pricing.


A frontal view of the Singapore Exchange building at the financial district in Singapore. The SGX is expanding its portfolio with plans to launch steel contracts in the next 12 months as China churns out a record amount of the alloy.

Last year, the nation allowed foreigners to trade iron ore for the first time on the Dalian Commodity Exchange following the launch of a crude oil futures contract. China produces half of the world’s steel, and rebar and hot-rolled coil derivatives are currently heavily traded on the Shanghai Futures Exchange, while Dalian’s iron ore futures have the highest liquidity globally. “The overriding objective of Chinese exchanges is to serve the physical market need in China,” Chin said on Thursday. “From the perspective of offshore players, are you looking to solve some of the pain points? For example, a product in US dollars.” China’s first-quarter steel production smashed records. Mills fired up furnaces to meet stimulus demand as the economy recovers from a slowdown that had been weighing on materials markets since the middle of last year. Steel futures in Shanghai have rallied 12% this year, and mill profitability is close to the highest level since September.

Potential users of SGX’s new steel contracts include mainland players, intermediaries and Southeast Asian participants who are looking for an offshore exchange to trade in dollars, Chin said. While the steel sector had a “mental barrier” toward the use of derivatives to manage risk – instead adjusting physical cargoes – the market is now more aware of financial tools, he said. In the iron ore market, prices have been on a wild ride this year due to a series of supply disruptions, including a dam disaster at top producer Vale SA, and bad weather in Australia that crimped output from top miners. Benchmark futures in Singapore has gained over 32% this year.

“Iron ore’s been languishing in some sense, in the deep pits of volatility for a very long time and it’s now climbed quite a bit,” said Chin. “Volatility is going to be driven – not so much by expected factors in market landscape – but unexpected changes,” Still, the continued strength in volumes recorded for the first quarter could mean an all-time high for iron ore this year, said Chin. Trades for the exchange’s high-grade contract, which was launched in December, is also expected to pick up, said Chin. Most transactions trade the spread between high-grade and benchmark prices, he said.

Sources and photo-credits: Gulf Times, Bloomberg