Singapore Exchange is reporting strong demand for its iron ore derivatives from hedge funds, proprietary traders and asset managers partly using the commodity as a proxy for the Chinese economy.

Speaking at the SGX Commodities Day in London, Cheong Jin Yu, director of commodities at SGX Group, said hedge funds, trading groups and asset managers now account for almost half the trading in the SGX iron ore complex.

He said: “If we look at the participation by business type, financial participation has really grown over the past five years which shows how iron ore has spread its reach out from the physical players and banks who were there when the market started, whereas now we are seeing funds, principal trading groups and asset managers getting involved with iron ore.”

The influx of these financial clients has boosted the size of the SGX iron ore market to record levels, Jin said on Tuesday: “We’re probably looking on track to achieve a new volume record for iron ore. As of end-Sep 2023, our iron ore volumes had already exceeded that of the whole of 2022 at 3.2 billion tonnes (vs 2022 full year volume at 3.1 billion tonnes), which is about two-and-a-half times the size of the physical underlying market.”

SGX cleared 480 million tonnes of iron ore derivatives in September 2023, the latest monthly record set by the firm.

Jin told the Commodities Day international engagement with the SGX iron ore market is also growing: “The global participation is nicely spread out across the regions and that reflects how the volumes in our night session, which is the Singapore evening time, have picked up to now account for about 20% of the market compared to 10% only four or five years ago.”

The SGX commodities director also said iron ore options volumes are showing promise as financial participants become more familiar with the SGX market. “Iron ore options now account for about 20% of the market, compared to 14% a year ago, and we expect this to continue to grow,” Jin said.

The SGX commodities director continued by noting two idiosyncrasies of iron ore market: “The almost unique thing about iron ore is the curve is always backwardated. In the past decade or so it’s gone into contango maybe twice which means if you held the second month and rolled it at the end of the month every month, the roll returns are positive every single year.” Jin said a trader that bought iron ore in 2015 and rolled it every month would have increased their investment ten-fold over that time.

Jin concluded by telling the delegation: “The other thing is that iron ore is highly correlated to China’s economy. If you take China’s reopening in October last year, iron ore has had the best response to the reopening of China so people are starting to look at iron ore as an investment product. And with SGX pioneering the virtual steel mill, market participants can trade across the entire value chain including the newly launched steel rebar.”

SGX’s commodities derivatives volumes were up last month 77% compared to September 2022 to a record monthly high of 5.4 million contracts traded.

William Chin, head of commodities at SGX, said in February the firm was looking to increase transparency in the shipping industry as the Asian exchange boosted its Baltic container freight route futures coverage.