Germany’s Deutsche Bank has bought a 49% stake for an undisclosed sum in iron ore broker London Dry Bulk to help develop the iron ore spot and derivative market, LDB said on Wednesday.
The move comes at a time when both steelmakers and iron ore miners are looking at alternative pricing mechanisms to better reflect the dynamics of the steel market in iron ore prices and developing the spot market is among the major options.
“LDB is facilitating the establishment of a seaborne physical prompt market in iron ore on a fixed price and index price basis,” LDB said in a statement. “Deutsche Bank will provide liquidity to the trading platform, which in turn will enable the iron and steel industry effective price risk management for the first time.”
The bank would be represented at board level within LDB, the world’s first physical and financial iron ore broker, whose remaining 51% is owned by unlisted London Commodity Holdings.
“The iron ore market is experiencing huge changes,” Ray Key, Deutsche Bank’s global head of metals trading, said. “We are witnessing a breakdown of the benchmark process and a significant switch to the spot market for transacting business.”
In the decades-old annual benchmark system, iron ore prices are set through a series of lengthy and often bitter negotiations between the steelmakers and top iron ore miners -- Rio Tinto, BHP Billiton and Brazil’s Vale.
The trio together control about three quarters of the 800 million ton annual market in seaborne iron ore. However, extreme volatility in steel prices has prompted miners to try to better align the pricing in iron ore to the steel market by looking at alternative price mechanisms such as index-based pricing and the spot market.
Increasing interest for an alternative pricing system prompted Deutsche Bank and Credit Suisse to launch an over-the-counter (OTC) iron ore paper market last May, where Credit Suisse expects the trading volumes to double this year. “LDB, Deutsche Bank, and other market intermediaries are part of the iron ore market evolution,” Key at Deutsche said.
Almost all analysts predict a fall in annual iron ore prices this year due to slumping steel demand and massive production cutbacks in the steel industry. A Reuters poll in end-January showed an expected fall of 30%.
Swaps are quoted based on The Steel Index (TSI) set by producers based on actual traded prices and settle against the TSI physical index.
LDB quotes swaps in lot sizes of 5,000 to 20,000 tons, Iron ore swaps are based on CIF China.
Physical prices are FOB East and West Coast India and CIF China for prompt delivery. (Reuters)