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Record open interest for SGX iron ore lump premium contract in July

Highlights

The Singapore Exchange had record open interest on its iron ore Lump Premium contract in July with 72,150 lots, or 7,215,000 mt of derivatives contracts outstanding, up from the previous record in June of 63,804 lots.

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July trade was 535,000 mt on SGX's lump premium contract, which settles against Platts' spot lump premium assessment (IOCLP00), up 161% on the year.

Market sources said the rapid rise in physical lump premium since the all-time low of $0.0155/dry mtu on April 12 may have encouraged participants to hedge their physical exposure.

"When lump premium was shooting up, many became scared and wanted to hedge," said an international trader. "Then close to its peak, sellers struggled to sell cargoes and turned to the paper market."



July trade was concentrated in July and August strips, with July trade cleared at 20.5-21.75 cents/dmtu and August strip trade cleared at 18-20.5 cents/dmtu.

Since its peak for the year on July 26 at $0.2210/dmtu, Platts seaborne lump premium assessment fell 14.3% or $0.0295/dmtu to $0.1770/dmtu Wednesday.

Demand for iron ore lump cargoes fell sharply following its peak as end-users turned to cheaper alternatives. But recently several sources said lump premiums may rebound in coming days in anticipation of stricter environmental controls in China in the near-term.

In the longer term, market participants have also expressed concern about possible sintering cuts nearer the winter which may support physical lump premiums. The Chinese government typically strengthens pollution controls during the winter leading end-users to turn to lump in lieu of sintering fines which is more polluting.

Reflecting these expectations, open interest for the October, November and December strips grew to 600 lots, 600 lots and 100 lots respectively in August compared with zero the previous month.

In line with this increased interest towards lump premium derivative contracts, Platts has increased the frequency of Platts iron ore spot lump premium assessment 62.5% Fe CFR China (Code: IOCLP00), to a daily basis from a weekly assessment published on Wednesdays, from August 1, 2017.

Its base specifications are: 62.5% Fe; 3.5% silica; 1.5% alumina; 0.075% phosphorus; 0.02% sulfur and 4% moisture.

Market participants have reacted positively to this change, seeing the increased opportunity to hedge their positions.

"Now there is opportunity to do more paper trading for lump. With increasing liquidity, we would like to do more hedging," said a trader based in Zhejiang.

--Takmila Shahid, takmila.shahid@spglobal.com
--Desiree Quah, desiree.quah@spglobal.com
--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com