Iron-Clad Swaps

However much the politicians in Washington, D.C. rail against swaps and derivatives, it amounts to about as much as the legends of Xerxes ordering his retainers to whip the ocean for disobeying him. Amidst the debate about how to limit the exposure of U.S. banks to derivatives, a brand new market is taking shape. This is not a new derivative, but rather applying old tricks to a new market - iron ore.  


The global iron ore trade is huge, totaling about 840 million metric tons and $100 billion a year. Oddly enough, though, it was a market that for 40 years was managed by the major iron producers holding once-a-year negotiating sessions with major buyers (steel companies, mostly) to set the price for the year.

This approach has worked well enough for the major producers, names that include Brazil's Vale (Nasdaq:VALE) and Anglo-Australian giants BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP). Customers, though, have been less pleased with this arrangement in recent years and the Chinese in particular have been looking for alternatives. Bowing to this pressure, the major companies began ditching the annual pricing concept earlier this year in favor of quarterly pricing.

For the complete story, please go to: 
http://stocks.investopedia.com/stock-analysis/2010/Iron-Clad-Swaps-VALE-BHP-DB-CS-MS-CME-MT0709.aspx