Banks expect massive growth in iron ore swaps

The abandonment of the 40-year benchmark pricing system for iron ore will lead to a rapid expansion of the swaps market, say market pioneers Credit Suisse and Deutsche Bank.

The arrests of Rio employees in China on corruption charges and their subsequent convictions at the end of March have made the issue of iron ore pricing particularly topical in some sections of the financial media. But, market practitioners were expecting changes several months earlier, as the benchmark pricing mechanism for one of the world's leading commodities had become increasingly untenable.

Differentiated pricing derived from the spot price, itself determined by supply and demand, has replaced a 40-year-old system based on annual contracts that was increasingly causing frustration to producers and was being circumvented by consumers when it suited. The new, market-based arrangement is expected to lead to a rapid expansion of a derivatives market...

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