Iron ore trading a lucrative gameComment on this story
For commodities traders looking for a six figure salary with a bonus of up to 300 percent, iron ore is the new pot of gold.
The latest bulk commodity where spot markets have evolved to to replace annual pricing, the raw material for steel-making is following a path established by coal and steel.
But the steel market is near saturation and loss-leading coal has failed to build liquidity after its initial boom years, traders say.
Among other youngsters in commodity trading, volatility is low in freight market derivatives where rates have slumped and the hugely oversupplied European Union carbon market is seeking life-supporting intervention from Brussels.
While the recruiting and economic environment may be weaker than a decade ago when commodities began a long boom, recruiters say iron ore traders are more in demand and better paid than ever.
“The key to the demand for iron ore traders is that a large number of merchants and investment banks want to increase their exposure to this new market and there is a relatively limited number of traders out there,” said Richard Usher, a commodity recruiter at Sage international.
“Obviously the way iron ore is now being priced makes it more attractive for other players to try and break down the established relationship between producers and end users.”
Iron ore pricing for decades was controlled in closed-door talks among the big three miners: Vale, Rio Tinto
and BHP Billiton in negotiation with the big steel making companies.
The move away from an annual benchmark system towards a shorter-term index-based pricing mechanism in 2008 gradually increased the share of seaborne iron ore traded on the spot market.
“There is a shortage of people with experience in iron ore trading because it was a much smaller market before,” said Macquarie iron ore analyst Colin Hamilton.
“But the big three have been steadily losing market share, leaving a gap for new players. Merchants are now trying to get hold of that market share, attracted by increased liquidity in the physical spot market and the financial market.”
Hamilton estimated the direct spot market now accounts for about 20 percent of the 1.1 billion tonnes global seaborne trade, up from about 12-15 percent two-three years ago.
The development of a derivatives market has also lured big traders and financial institutions, increasing the need for ore know-how to trade paper and physical.
“(It) has provided the opportunity for Trafigura to attempt to replicate the business model from our base metals and energy trading activities,” said Joe Kenel of commodities trading house Trafigura. “We have always used derivatives instruments to manage our price risk.”
Leading oil trader Vitol recently made its debut in iron ore this year, with an offtake agreement with London Mining.
Now iron ore traders are leaving banks to join large trading houses.
“There are austerity measures and limits on bonuses at banks, so they're moving or have moved to Trafigura, Mercuria, Cargill and Noble - they're attracting the best players,” a Singapore-based iron ore broker said.
As merchants are not subject to the same regulatory hurdles as financial players, they have been able to snap up some of the best talents who felt frustrated when trying to trade physical commodities at banks.
More money helps too.
“There is a perception that traders can make significantly more money, get guarantees, bonuses and sign-on bonuses by moving to iron ore,” a UK-based commodity headhunter said.
An iron ore trader with more than eight years experience can command a basic salary of 200,000-300,000 pounds sterling ($320,000-$480,000) a year at an investment bank or a big merchant, plus a bonus of up to 200-300 percent his basic salary in a good year, recruiters said.
A young trader with two years experience in iron ore can hope for a basic salary of around 100,000 pounds a year and the same again in performance-related bonus.
As banks and merchants battle over the few traders available, often bonuses are guaranteed for the first year too.
This compares with salaries of about 40,000 pounds a year for a junior trader and 80,000-100,000 pounds for a more experienced one at the few, smaller steel trading firms who were trading iron ore three-four years ago.
And bonuses were rarely much bigger than 50 percent of their salary, even in a good year, recruiters said.
Although some iron ore traders are still based in London, many of them today have moved to Singapore or China, to be closer to the largest consumers. The move, however, may come at a high cost for the employer.
“The high performers want top dollar salaries, low tax, sign-ons, bonus guarantees and school fees of $1,200 a month: the international schools are abundant but expensive,” the Singapore-based broker said.
“So young, single, traders who won't need all those expensive benefits are very sought after. But only a few guys have any real trading experience of physical iron ore.”
Iron ore offers an opportunity for the independent trading shops to rapidly increase turnover - vital for those looking to partially float or tie up with a sovereign wealth fund.
“For us it's about logistics, not endlessly trying to call the market - there are no arbitrages and only one price: China,” said a trader at large independent energy trading house who has recently moved from coal to iron ore.
“We're geared to moving huge volumes of physical commodities and while coal is a huge bulk commodity, iron ore is even bigger.” - Reuters