Analysis: ICE faces tough competition in iron ore swaps launch

Tue Feb 12, 2013 2:59pm EST
 
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By Silvia Antonioli and Manolo Serapio Jr

NEW YORK/SINGAPORE (Reuters) - IntercontinentalExchange Inc ICE.N may struggle to wrest much business from Asian rival Singapore Exchange SGXL.SI as U.S.-based ICE embarks on its latest push into the lucrative, 115-million-tonne market for iron ore swaps.

More than three years after the launch of its first iron ore derivative, the U.S. exchange expanded its offering with Monday's launch of two iron ore swap futures contracts.

The Atlanta-based exchange aims to capitalize on growing interest among U.S. investors in using iron ore derivatives as a play on China, the world's No. 1 consumer of the key ingredient in steelmaking.

But some traders say it will be a challenge to lure money away from an entrenched benchmark that has the support of the market's biggest traders.

"The general impression seems to be that the new ICE contracts will not make much of an impact. Although there is growing liquidity, volumes are still not high enough to be split (between exchanges)," said Lee Taylor, an iron ore broker at London Commodity Brokers.

SGX, which was the first to launch a cleared iron ore contract in 2009, has more than 90 percent of global volume, according to SGX and trader estimates.

Its proximity to China, the world's top iron ore importer, also represents a clear advantage for the Asian exchange.

However, there are factors in ICE's favor. For one, it may have a home advantage, although the relatively small size of the U.S. market limits potential gains.   Continued...