Singapore's SMX eyes Q2 launch of iron ore futures

The Singapore Mercantile Exchange plans to launch an iron ore futures contract in the second quarter, its chief executive said on Wednesday, as it moves to tap a growing need for a more transparent pricing of the steelmaking ingredient.

SMX announced the launch period a day after Indian Commodity Exchange (ICEX) disclosed plans to launch an iron ore futures contract in a month, after securing approval of the commodity regulator.

While Singapore and India look to be racing to establish the world's first iron ore futures market at a time when spot prices are marching toward record highs, analysts say such a hedging instrument may take time to gain traction and could initially suffer from limited liquidity as it competes with the more widely traded forward swaps.

"Core aspects of the SMX iron ore futures contract have been finalized in conjunction with MAS (Monetary Authority of Singapore) and industry feedback for anticipated launch in Q2 2011," Thomas McMahon said in an emailed response to a Reuters query.                                            

SMX, controlled by India's Financial Technologies, said in September it was looking at launching a cash-settled iron ore futures contract this year, based on the iron ore index by data provider Metal Bulletin which uses a 62 percent iron content benchmark.                                          

McMahon said the SMX contract will be open to foreign investors.

At present, investors hedge iron ore price risks via forward swaps or cash-settled derivatives that give buyers and sellers price certainty.

The shift last April to a more flexible quarterly pricing system for iron ore after the collapse of a four-decade-old annual scheme has fragmented the market for swaps as exchanges from Singapore to Europe compete for the business potential of a physical market second in size only to crude oil.

Key iron ore indexes, based on spot prices in China and which miners use to determine quarterly contracts, hovered near record levels on Tuesday as tight supplies continued to support prices.