JPMorgan is looking to trade physical iron ore and coking coal and expand its activity in physical steel, an executive at the bank said this week, following other major financial players that have moved into these markets.
The U.S. bank has been an active trader of steel and iron ore derivatives since late 2008, mainly on its customers' behalf. It could soon join a trend that has included Deutsche Bank and Macquarie Bank Limited.
Banks are venturing into physical iron ore trading to better manage their financial positions and help forge financing deals for mining companies, steelmakers, automakers and construction companies.
"Trading in these markets would give us a better insight into what's happening and how markets are moving," Jeffrey Kabel, executive director for global ferrous products at JPMorgan told Reuters in an interview.
"We already trade thermal coal and are using it as a model to consider adding physical iron ore and coking coal as these markets physically move in a similar fashion."
In the past few months some major commodity traders also have entered the iron ore market, which until two years ago was dominated by the three big producers — Brazil's Vale, BHP Billiton and Rio Tinto Ltd.
The development of a derivatives market, a move towards shorter-term pricing mechanisms for physical material and a larger spot market have allowed the entrance of new players.
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JPMorgan plans to expand its trading of both steel derivatives and physical steel.
Kabel said he noticed increasing interest in steel and iron ore derivatives from both industrial and financial customers, including hedge funds.
Even while the uncertain global economic outlook is affecting the steel market and could slow the growth of this adolescent derivatives sector, the bank has boosted its trading volumes in the past six month and has noticed more interest from various sides.
Traders and miners remain the largest participants, but more hedge funds and steelmakers have also been involved lately, according to the bank.
"Larger European and U.S. steelmakers are studying this market closely, particularly since the beginning of this year," Kabel said.
He said the hot-rolled-coil (HRC) swaps cleared by the CME group and a soon to be launched CME steel scrap swap were among the steel derivatives contracts with the greatest potential.
"We are seeing significant growth in the CME HRC contract; it's common practice in the U.S. to look at hedging your steel with the HRC contract," Kabel said.
"And I think the scrap contract has got a big potential, because there is a large market for it. There are a variety of different industries that look at scrap, including construction, shipping and demolition."
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