MSN Money: OTC platform to offer iron ore access
What is a better recipe to blow up? Credit Suisse and Deutsche Bank are creating a derivative market based on a spot market that is under 20% of a seaborne market, which is only 1/2 the total world’s market. Let me go through that a bit better. We have a tail on the flea wagging the flea, and then the dog. And now we can have derivative contracts that are, of course, cash settled, so no one has that silly problem of actually making delivery. Can we say Vegas? And can we say in three years we are going to have someone who writes down $1-2 billion on this system.
If you are going to do a derivative market, do it with actual delivery. The Indians would love that; the Chinese would respect that; and I think it would be a smallish market that would work. The issue is these silly bankers are trying to set up contracts on a oligopoly-supplied market with 10-year contracts with no delivery.
My prediction is, if the market gets liquidity, it will be 10 times the size of the spot market, and it will not be relevant, as most real transactions it is hedging against are not driven by the spot market. Ford, for example, could not care less about the spot market in iron ore, nor could Arcelor Mittal for the most part. They do long-term contracts, and if they hedged, the size of the hedge would be larger than the spot market. Damn. I see something to do here: build a 10 billion position on a delivery date and then just buy the 10 shipments of ore that I need to make my settlement price. Some smart traders like Noble and Glencore, for example, could really game this system. The other option is that the market dies a quiet death, which would not be a bad thing.
