By Alex MacDonald Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Deutsche Bank iron ore trading could become more popular than steel trading since steelmakers prefer to hedge their input costs rather than output, Ray Key, managing director and head of metals trading at Deutsche Bank, said Friday. Deutsche Bank Friday launched a new over-the-counter spot iron ore market in tandem with Credit Suisse (CS) to help steelmakers, iron ore miners, steel suppliers and consumers lock in their costs and profits amid burgeoning iron ore prices. Iron ore - a key ingredient in steel making - is one of the world's largest physical commodity markets, which has recently witnessed significant rises in price - both benchmark and spot. However, to date, there has been limited ability for those with exposure to the market to manage these risks. The two banks are offering over-the-counter, cash settled swaps with a range of maturity dates to help manage those risks. Key said he expects the iron ore swaps could develop at a quicker pace than steel hedging mechanisms such as the London Metal exchange's new steel futures contracts, launched in February. "On consumer side, we have had interest to use the iron ore as proxy hedge for steel. There is more willingness to see iron ore hedging instruments develop than steel" hedging instruments develop because "there is a lot more interest for players to hedge their inputs rather outputs," he said. Mines produce about 2 billion tons of iron ore annually, of which 4% is traded on the spot market. A hedging mechanism for iron ore hasn't existed until now because virtually all iron ore produced was sold through annually negotiated benchmark contracts between the world's largest iron ore producers - Brazil's Companhia Vale do Rio Doce (RIO) is the largest sea-borne iron ore producer followed by Australia's Rio Tinto PLC (RTP) and BHP Billiton Ltd (BHP) - and large steelmakers in Asia. But booming demand from China, however, has led to the creation of a spot market where prices have more than doubled over the past three years, Key said. Most of the spot iron ore trade occurs between India and China, even though India is a relatively small iron ore producer. "India has been filling in the gap" for iron ore because the large iron ore companies sell most of their output through annual contracts. Key said on the first day of trading, his bank traded over 100,000 tons of iron ore swaps. The figure doesn't include Credit Suisse's volume since the two banks operate separate trading desks despite developing their products to similar metrics. The product was developed independently of Credit Suisse but the two banks decided to harmonize their products in order to improve liquidity, Key said. These swaps will be settled on a monthly basis against the iron ore price and indexes published by Metal Bulletin and Steel Business Briefing and against spot iron ore on a cost, insurance and freight delivered China basis. The two banks plan to offer the product with a monthly expiry between July 2008 and June 2009. "Over time, that maturity will be pushed out to over three years," Key said. A wide range of investors have expressed interest including hedge funds, private wealth funds and equity players. Deutsche Bank has also been "talking to U.S. steel mills as well but the obvious target is the steel mills within Asia since they're the primary consumers of seaborne iron ore," Key said. Key said he expects small-to-medium-size iron ore miners will also be keen to use the new product. "Given how financing is becoming more difficult after the banking crisis, this will help them lock in cashflows" for investment in new capacity," he said. Aside from iron ore trading, Deutsche Bank is already trading the recently launched London Metal Exchange steel futures. It is also trading hot-rolled coil and cold-rolled coil over the counter for the last two months. Hot-rolled coil and cold-rolled coil are finished steel products used by the automotive and home-appliance industry. -By Alex MacDonald, Dow Jones Newswires; +44 (0)20 7842 9328; alex.macdonald@dowjones.com (END) Dow Jones Newswires 05-23-08 1544ET |