Eye watering #1: America’s Office of the Comptroller of the Currency is one of the country’s four main bank regulators. It has just produced a quarterly report that looks at the exposure US banks have to derivatives. The good news is that exposure to these types of securities fell in the final quarter of 2009 for a mixture of reasons, part of which seems to be fears of legislation cracking down on their use. Some of the figures are truly enormous, despite the fall. The report said that exposures in the contracts remained highly concentrated, with the five largest five banks continuing to account for 97% of overall exposure and 88%. (Goldman Sachs, Bank America, JP Morgan, Morgan Stanley and Wells Fargo were the big five).

Eye watering #2: The regulator said the net current credit exposure, (the amount banks risk losing upon the possible collapse of counterparties on their derivatives trades), fell 18% in the 4th quarter to $US398 billion. Gulp!  Just imagine the losses and problems for these and other big banks if the world hit another credit crunch. The report said interest rate derivatives were again the largest asset class, accounting for 84% of derivatives volumes.

Eye watering #3: The report shows that the notional amount of derivatives held by insured US commercial banks rose $US8.5 trillion (or 4.2%) in the fourth quarter to $US212.8 trillion. Interest rate contracts increased $US7 trillion to $US179.6 trillion, while credit derivatives were up 8% at $US14 trillion.

Financial Times knows best: In a report on the changes to iron ore pricing, the Financial Times referred to “UK-based BHP Billiton and Rio Tinto.”  Well the author got Rio right; after all it decamped to London after agreeing to be based in Australia after RTZ mopped up CRA. Hence the tougher approach to BHP when it wanted to merge with Billiton. The upshot was that the company would remain based in Australia, with a local chairman. The UK office is the “second” office for the low performing bits that came from Billiton. BHP is a dual-listed company (like Rio). The iron ore bits the FT was reporting about are based in Australia, not West Yorkshire.

Iron ore #1: That FT report came on the same day as Stern Hu and three other Rio executives appeared in a court in China, with media reports suggesting that Hu has pleaded guilty. Meanwhile, Rio CEO Tom Albanese was in Beijing to speak to a high-powered Government group. The timing of the speech had been leaked last week to Australian media in China. In his speech Mr Albanese said “It was great” to be back in China for the second visit in a month. Rio and Chinalco, spurned last year as Rio’s savior, and still the company’s biggest shareholder, are to co-operate in the development of a problematic iron ore deposit in Guinea in Africa. All pals again after the unfortunate events of 2009.

Iron ore #2: But China will not like the idea of the rival Japanese steel mills agreeing to move to quarterly spot market based contracts. At the moment that could see the price more than double from $US60 a tonne ex-Australia to more than $US140 a tonne (Both prices include freight). There’s still a lot of work, but the impetus for a new type of agreement is there after BHP convinced the Japanese, Korean and big European mills to agree to a quarterly pricing arrangement for much of its coking coal exports, and won a price rise of 55%.

Steel production explains iron ore: No wonder demand for iron ore is rising rapidly, and prices even faster. World steel production last month was 108 million tonnes, 24.2% higher than February 2009. China’s crude steel production for February 2010 was 50.4 million tonnes, up 22.5% on February 2009;  Japan’s production jumped 54% on a year ago to 8.4 million tonnes, South Korea saw a 25% rise to 3.9 million tonnes and Germany’s steel output was up 34% at 3.4 million tonnes. America produced six million tonnes in the month, up 51% on a year ago. Australian steel output soared 89% to half a million tonnes last month, according to figures from the World Steel Association. February’s production was about the same as in January.