London, 24 March 2010

Coal trading platform globalCOAL will launch an iron ore trading platform at midnight on Tuesday to meet a growing need for standardisation and risk management, globalCOAL Chief Executive Eoghan Cunningham said.

Historically, iron ore has traded under long-term contracts with minimal spot business, but the pattern of trade has been changing rapidly during the past three years.

Big Chinese demand for raw materials for steel production has drawn new players to the markets that are used to trading commodities with risk management tools and who want the same facilities for trading iron ore -- a gap globalCOAL hopes to fill with the globalORE platform, Cunningham said.

"We've created the contract and then we'll develop liquidity in spot and forward trade. We're announcing the launch of SIOTA and globalORE and the screen is ready to go, but trading won't start until Q3," he said.

Spot iron ore made up around 30-40 percent of the 900 million tonnes of seaborne trade in 2009 and this proportion could reach 70 percent in five years. "There's a tremendous amount of interest in iron ore trade from both banks and traditional commodity traders," Cunningham said.

"But European, Japanese and Chinese steelmakers, banks, etc will find it more difficult to get into the iron ore market because they need a certain amount of standardisation first - they need swaps and to have a physical presence which they can offload their exposure," he added.

Calrity

The globalORE trading platform with its trademarked Standardised Iron Ore Trading Agreement (SIOTA) will provide price clarity and enable new players to start trading more easily, he said.

"With globalORE, we've applied the globalCOAL model to the iron ore market, we've standardised the contract and are looking to introduce liquidity to the market," Cunningham said.

Bilateral credit agreements, price and performance risk have been easier to manage through use of a standard contract and specifications, he said. "We're optimistic that we will be able to help them short circuit getting credit agreements or make it easier for them to get credit acceptance due to standardisation and the use of the Exchange For Physical mechanism on globalORE."

The spot iron ore market has a reasonable amount of liquidity already, despite the fact that trades take place on a variety of contracts for a range of specifications. Standardisation should speed up the growth of traded volumes, he said.

Physical commodity traders such as Noble and Cargill are already active in the iron ore market, but sell back-to-back deals because of the variety of grades involved. Unlike banks, physical traders can deal with a much wider range of counterparties.

Index-linking prices has been proven to mitigate risk in the coal market and widely adopted by producers, traders and end-users. Some coal companies index-link their prices for 100 percent of their sales already and a similar pattern is likely to emerge for iron ore, he said.

As the iron ore market opens up, an increasing percentage of trade may be exposed to spot price movements via index- linking rather than being bought or sold at fixed prices, Cunningham said.

Establishment of clear price benchmarks to form an index to which contracts can be linked is vitally important, he said. globalORE's SIOTA contract will generate like for like price comparisons and facilitate price discovery. globalORE will start trading physical iron ore but aims to be trading swaps as interest builds.

There is a nascent iron ore swaps market of around 30 million tonnes, of which 90 percent was cleared, but this is a tiny proportion of total seaborne trade. Coal swaps began the same way in the 1990s but grew to several times the size of the physical market within 5 years.

Ends --

By Jackie Cowhig, Reuters - for Commodities Now