Increased Interest in Iron Ore Derivative Trading Bolsters CME Group Volumes

by Trefis Team
CME Group
Rate   |   votes   |   Share

CME Group’s (NYSE:CME) Clearport is the clearinghouse for two new iron ore average price options contracts trading on the New York Mercantile Exchange (NYMEX) as of March 14. CME is one of the largest exchanges in the world for futures contracts and options, with main competitors including NYSE Euronext (NYSE:NYX), Nasdaq OMX (NYSE:NDAQ) and new stock exchanges like BATS Global and Direct Edge.

We have a price estimate of $330 for CME’s stock, implying a roughly 10% premium to market price.

Two New Iron Ore Options Introduced

The two options contracts are based on average physical prices as supplied by information providers The Steel Index and Platts. [1]

CME executed its first trade on iron ore options contract on March 18, in a deal brokered by Market Securities. [2] CME Clearport has actually previously cleared iron ore swaps, the first such instance occurring in October last year.

Global Iron Ore Industry

Global iron ore production is dominated by three large companies – Vale, Rio Tinto and BHP Billiton with 35.4% combined market share in 2009. [3] These three companies also control 61% of the world’s sea borne trade of iron ore.

CME’s Average Daily Trading Volume of Commodity Contracts

In 2010, the iron ore mining industry discarded the annual price benchmark system and moved to quarterly pricing, adding a new level of price volatility to the market. As a result of the added volatility, market participants will likely turn to swaps and options to hedge their exposure to this risk.

The trading volume of iron ore swaps increased from about 7 million tons in 2009 to over 20 million tons in 2010. These volumes have continued to climb and, according to one analyst, could see annual totals double over the next five years. [4]

Steel companies will also look to protect their margins and stabilize prices by utilizing swaps and options as risk management tools. The effect should contribute to sustained growth in CME’s average daily trading volume of commodity contracts, for which we currently predict a rise from about 0.9 million in 2010 to about 2.4 million by the end of our forecast period.

  1. Launch of Iron Ore Average Price Options on the NYMEX Trading Floor and CME ClearPort, March 3, 2011, CME Group []
  2. CME Group Executes First Iron Ore Options Trade, YTWHW []
  3. The Iron Ore Market 2009-2011,UNCTAD []
  4. Iron ore swaps trade swells as contracts shorten, Reuters []
Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!