'More players'

Nor has Rio matched BHP's increase in spot sales. It sold most ore priced on a benchmark in the second half of 2009, after selling about half as spot in the first half.

"Markets are dynamic, markets are moving toward a position of shorter terms," Chief Executive Officer Tom Albanese said on a conference call when Rio posted its full-year earnings on Feb 11. "A lot of that's associated with more players that are involved in the market."

For the benchmark to survive, "it will need to evolve. And again if it does not evolve it will not survive", he said.

Market freeze

Swap trading started with volumes of about 250,000 tons a month, Credit Suisse's Killicoat said. It grew to about 3 million tons by September 2008, the month Lehman Brothers Holdings Inc was declared bankrupt amid the worsening global financial crisis, at which point the market froze. Volumes have since recovered, he says.

"The tipping point will come as benchmark pricing becomes less rigid and more physical material is sold on a spot and index basis," Killicoat said.

BHP has done just that, cutting the proportion of ore sold in the second half using the annual price. It sold the rest by other means, including spot sales, CEO Marius Kloppers said in a Feb 10 conference call. Illtud Harri, a London-based spokesman for BHP, declined to say how much was sold on spot.

The swap market allows ore producers to lock in volumes and prices as they see fit, rather than being tied to a benchmark that may not reflect current demand, said Simon Overy, who works on the iron ore team with Strickland at ICAP. The derivative enables steelmakers to hedge their main raw material, he said. ICAP declined to give the value of the trade its iron ore team is handling.

'Explosive' activity

Iron ore demand is rising as steelmakers restart blast furnaces and customers rebuild inventories. In China, spot prices have gained 49 percent in the past 12 months.

"Price activity in the iron ore spot market has been explosive during the early weeks of 2010," Citigroup Inc commodity analyst Alan Heap wrote in a Feb 2 report. Credit Suisse raised its forecast for the 2010 iron ore benchmark price, saying on Feb 4 it will rebound 50 percent to $86 a ton.

Chinese steelmakers have started contract price talks with overseas suppliers, Luo Bingsheng, vice-chairman of the China Iron & Steel Association said on Feb 9.

ICAP's Strickland said that to get more people to use swaps, their "traditional" view of the market needs to change.

"Currently there is still resistance from producers that prevents the launch of a liquid spot market in iron ore. The challenge is to change people's mindsets," he said.