LONDON - Credit Suisse expects volumes to double in its iron ore swaps business by the end of year following the demise of the traditional benchmark pricing system.

A rapid increase in swaps liquidity is giving junior mining companies the chance to lock in prices and gain project finance from banks, Credit Suisse Account Executive Phillip Killicoat told the World Mining Investment Congress on Monday.

"We have six or seven (projects) in the pipeline (for funding) ... that have hedged forward up to six years in order to secure more attractive cost of capital and covenants," he added.

Volumes in the Credit Suisse swaps business were running at about 60 million tonnes, Killicoat said.

"The liquidity is there... it's still a very small fraction of the overall physical market, but the growth potential is very promising."

Volumes at Credit Suisse, which launched the swaps two years ago, have already shot up from about 15-20 million tonnes at the start of the year and could double by the end of the year, Killicoat told Reuters following his presentation.

The growth would likely follow the pattern of swaps in thermal coal, which took around two years to get a critical mass before volumes grew significantly.

Swaps prices were available for two years in advance on a cleared basis and for much further in the future on a custom basis, he added.

STEELMAKERS H0LD BACK

But weak particpation of steelmakers in the iron ore paper market will continue to limit its growth, Per Storm, managing director of the Raw Materials Group, told the conference.

"I think it's going to take a while before it's part of the day-to-day business of the steel industry," he said.

It was unlikely that an iron ore futures contract with physical delivery would ever be successful because of the wide variation in iron ore grades, Killicoat said.

The world's top three iron ore miners have abandoned the decades-old annual benchmark system in iron ore pricing, to shift to a more flexible one, where they settle prices every quarter based on the spot iron ore market.

Steelmakers resisted the change, saying it would force them to change their long-term contracts with their own steel customers, but recently giants such as ArcelorMittal and Thyssenkrupp have agreed on quarterly deals.

The move away from the benchmark has sparked a surge of new products such as swaps and price indexes allowing market participants to hedge their exposure to volatile prices.

The world's top three iron ore miners are Brazil's Val, Rio Tinto and BHP Billiton, respectively.

Spot iron ore prices have more than doubled this year as Chinese steel mills bought heavily betting on a global recovery in the steel sector.

Sourced from www.miningweekly.com