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China’s 1st iron ore futures set for launch on Dalian bourse today
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China’s Dalian Commodity Exchange will today launch the country’s first iron ore futures with physical delivery as it seeks to gain more pricing power on the commodity.
Chinese steel makers are the world’s biggest iron ore buyers. Volatile iron ore prices have exposed steel makers to risks.
Chinese steel makers suffered losses from volatile iron ore prices and futures provide hedging tools for domestic steel makers and spot traders, said Zhang Yichen, an analyst with Yongan Futures Research Academy. The futures help Chinese steel mills gain pricing power.
Physical delivery will be completed with imported iron ore powder which contains 62 percent iron as trading object, or both refined iron ore powder and iron ore concentrates with iron above 60 percent as replacements, said a statement on the bourse’s website.
The trade will use stockpiles at ports including Tianjin, Lianyungang, Rizhao, Tangshan, Qingdao and Caofeidian, as well as stocks in some steel mills, the statement said.
The size of each lot will be 100 tons, have a daily trading limit of 4 percent and be denominated in yuan, the statement said.
Dalian, a seaside resort in Liaoning Province, is home to one of China’s four futures exchanges and mainly trades agricultural products. The securities regulator announced the plan on October 11 and the bourse confirmed on Monday.
Iron ore is the most important raw material for steel making, with Australia, China, Brazil and India taking 80 percent of the world total output.
China is the world’s second-largest iron ore producer. It reported 440 million tons in output, 740 million tons in imports and 1.05 billion tons in consumption last year.
The three top iron ore miners, BHP Billiton, Vale and Rio Tinto, scrapped annual price talks in 2009 and turned to quarterly pricing and even shorter indices or spot pricing, pointing to huge hedging opportunities.
The Chicago Mercantile and Singapore Exchanges have traded swap options since 2011; the Indian and Singapore Commodity Exchanges launched iron ore futures in 2011; the Chicago Mercantile Exchange launched them in 2013; the Intercontinental Exchange and the London Metal Exchange announced iron ore futures in 2013.
Chinese steel makers have questioned the use of the Platts index as a benchmark: 80-90 percent of the production of the three top iron ore producers follows the Platts index in pricing, and the index is based on the tender prices of the three major producers.
The transparency of the Platts index has been questioned, and further research is needed to see whether it is manipulated, according to Wang Yingsheng, director of the China Iron and Steel Association Market Research Department.
Many Chinese producers said the iron ore index futures rely too heavily on the index, leading to control by the mining companies over the market.
Physical delivery cuts the chance for the major players to manipulate the market. It brings futures closer to the spot price, and better reflects supply and demand in the spot market.
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