The iron ore futures, which were listed on October 18 last year, saw the first delivery completed smoothly, with the I1403 Contract achieving the iron ore futures delivery of 100 contracts on the last delivery day, equivalent to 10,000 tons of spot goods. The whole delivery process was steady and smooth, fully testing the delivery process and delivery quality standards of the iron ore futures and showing that the “China-version” iron ore futures featuring the physical delivery are suitable for China’s national conditions and “market situations”.
Smooth delivery shows that the “China-version” iron ore futures are suitable for China’s national conditions and “market situations”.
It was the last trading day of the iron ore futures I1403 Contract on March 14, which was also the 100th trading day since the listing of the futures, with the I1403 Contract delisted with a unilateral position of 100 contracts. According to the sources, a total of 100 contracts of standard warehouse receipts were registered for the 1403 Iron Ore Contract, and the clients participating in the delivery were an iron ore trade company and a steel smelting company, with the goods for delivery at Lianyungang, the iron ore for delivery from Australia and the iron grade of 61.9% for the delivery quality, which meets the requirements for the delivery quality of the iron ore futures.
Market participants believe that, compared with the huge size of the spot goods, the delivery volume of 100 contracts is not large, which is related to the factors that the March contract was close to the Spring Festival, the delivery volumes of all the products were usually not very large and the I1403 Contract was not the dominant contact. It also shows the rational return of the iron ore futures prices to the spot prices, the reasonable basis between the futures and spot prices, and the lack of the space for arbitrage, which indicates that the designing of the iron ore futures contract system is reasonable.
“The first delivery shows that the designing of the iron ore contracts is reasonable, and the process of the delivery was very smooth,” said an official of the iron ore trading company participating in the delivery, adding that the company’s participation in the first delivery of the iron ore futures was mainly aimed to learn and understand the process and costs of the delivery as well as the possible problems in the delivery process, so as to explore the ways for the business innovation in the future.
The official also said that with a short period of participating in the futures market, the company is still making attempts and explorations. But the company realizes in the market business that China’s economic cycle of ultra-fast development has ended, the investment-driven growth model is not sustainable, the black industry is in the face of adjustments, all concepts and business models within the industry are facing challenges, and the traditional model of the circulation enterprises featuring buying at low prices and selling at high prices can no longer adapt to the changes in the market. Therefore, the company will take the delivery as a new starting point to make better use of the iron ore futures.
The successful completion of the first delivery of the iron ore futures also means that the world's first iron ore futures product with the physical delivery fully went through the test of the market, and indicates that the “China-version” iron ore futures, the first of its kind with physical delivery in the world, are suitable for China’s “market situations”.
Adequate preparations of the exchange and futures institutions guaranteed the first delivery.
As the connection point of the futures and spot markets, the delivery process is crucial for the effective operation and functioning of the futures market. It is learnt that to ensure the success of the first delivery of the iron ore futures, Dalian Commodity Exchange (DCE) had made adequate preparations before the delivery of the iron ore: first, DCE sent its workers to stay at the warehouses so as to monitor the whole process of putting goods in the warehouse and sampling and testing and conduct the benchmarking for the sample tests; second, DCE made the early warning scheme in advance to effectively avoid the delivery risks. Before the delivery, DCE dynamically analyzed and summed up the market positions, the operation of the prices, the basis situation and the in and ex-warehouse situations, made the early warning scheme and specified the persons for the responsibilities; third, DCE provided the clients participating in the delivery with comprehensive services. After analyzing the positions of the clients, it set up the contacts with the clients holding the positions in advance, followed the whole process of putting the goods in the warehouses and quality inspection from the time when the clients conducted the delivery forecasting, carried out the on-site inspections in advance to all the warehouses involved in the delivery business, and maintained the timely communication with the clients to detail the delivery process and remind them about the potential risks. The inspections showed that the iron ore in the physical delivery was of relatively high quality, and the relevant indicators were close to those of the standard futures products and met the standards of the alternatives. The delivery showed that during the physical delivery conducted repeatedly on the coke and coking coal futures, the participants have accumulated some experience for delivery, and the model of physical delivery for bulk commodities has been recognized by the market.
The futures intermediaries also contributed to the effective service and guidance in the smooth process of the first physical delivery of the iron ore futures. It is learnt that in the course of the delivery, Industrial Futures Co., Ltd., the buyer's agent, actively provided the services for delivery, got familiar with the delivery process in advance, strictly controlled the delivery risks, paid attention to the details of all the businesses, and ensured the smooth operation of the entire delivery process, having further improved the capacity for serving the clients on the black industry chain including coal, coke and steel, etc. through the service for the first delivery.
Sound Operation of Iron Ore Futures, Economic Functions Shown
It was also the 100th trading day of the iron ore futures since its listing on March 14, when I1403 Contract was delisted. Since its listing on October 18 last year, the domestic iron ore futures have operated smoothly with the active participation of the industrial clients, having become the iron ore derivatives market with the best liquidity in the world and shown initial functioning in serving the industries.
According to statistics, as of March 14, the last trading day of I1403 Contract as well as the 100th trading day of the iron ore futures, the futures product totaled a trading volume of 6.907 million contracts (unilateral, the same below), equivalent to a spot trade volume of 691 million tons of iron ore, 7 times the Singaporean swap market and 36 times the Singaporean futures market for the same period, with a total turnover of RMB 581.978 and an average daily trading volume of 69,100 contracts; the open interest saw steady growth with an average daily open interest of 110,500 contracts, and the open interest reached 34.82 million contracts on March 14. The iron ore futures have achieved the market size for serving the real economy.
In terms of the structure of the participants, the market operation has seen the participation of the industrial clients increased steadily, and the transaction ratio and the position ratio of the corporate clients have been stabilized at the level of mature products. Currently, the corporate clients account for 13.4% of the transactions and 31.31% of the positions on average, basically close to the level of the participation of the corporate clients in the entire market of DCE. Market participants believe that among the newly listed products, the ratios were relatively high, indicating that the industrial clients are active in participating in the iron ore futures. Currently, many domestic major iron ore traders and large and medium-sized iron and steel producers have participated in the trading, and a number of international major iron ore traders have also been involved, with the enterprises with the background of foreign investments accounting for more than 16% of the transactions of the industrial clients.
In terms of the price operation, the iron ore futures have reflected the supply and demand in the market to some extent, and a new market pricing model is taking shape gradually. (Currently, the market pricing of the iron ore is mainly dominated by the international iron ore price indexes. For example, the monthly average price of Platts index is usually adopted in the settlement of the spot goods and the Singaporean swap market adopts the monthly average of TSI index.) According to the statistics of market institutions, in terms of correlation, in the early period of the listing of the iron ore futures in 2013, the correlation of the dominant contract with the spot price of PB fine ore at Qingdao Port, the price of Platts index and the Singaporean swaps price were 0.77, 0.66 and 0.28 respectively; and in 2014, the correlation of the iron ore futures with the above-mentioned three prices have been increased to 0.94, 0.94 and 0.98 respectively. In terms of the basis, China’s iron ore futures price and spot price have achieved the stable basis relationship and shown the trend of narrowing over time.
“It can be learnt from the above situation that China’s iron ore futures prices differ from the tendency of international iron ore price index but are not divorced from spot market’s demands and the influence of port inventory has been included in market pricing system through the mode of physical delivery, thus avoiding the disadvantage that the trading price of small amount of iron ore decides the whole market price. Besides, it is generally reflected that the launch of iron ore futures has provided the market with another choice. In this case, the buyer can choose to buy at the proper price when facing iron ore of the same quality. That is, iron ore futures have exerted a positive influence on optimizing market pricing.” said Mu Wenxin, senior analyst from Hong Kong Jiaxin Group.
Mu Wenxin introduced that the launch of iron ore futures has led to enough market liquidity, steadily increasing position-holding amount, and gradually increased relevance of futures and spot prices, and the market has operated smoothly on the whole. In the period of price falling, many enterprises have bought spot goods while selling futures and managed to close the position in futures market after selling spot goods, thus successfully avoid the risk of price fluctuation; some steel mills that are good at grasping market opportunities have made the steel profit reach nearly RMB 300/ton through hedging across the market and across the products, thus effectively relieving enterprises’ operational difficulties under the current structural adjustment.
He believed that the carrying out of domestic iron ore futures trading will help enterprises to bring off their advantages and run businesses for the following reasons. First, domestic iron ore futures design better conforms to the actual situation of China’s steel mills and its quality and delivery are both more suitable to domestic enterprises than foreign trading; second, hedging methods have been increased and better hedging effect will present after the launching of iron ore options by DCE in the future; third, domestic iron ore futures can be used as a financial method to lock price difference and grasp arbitrage, speculation, and hedging opportunities. For steel mills, they will obtain a buyer; for traders, they will obtain a trading partner; and for speculators, they will obtain a potential product of profit.
In his opinion, annual negotiation has been changed into seasonal and monthly negotiation in foreign and domestic iron ore trading and the “seller” market has been changed into “buyer” market in terms of foreign iron ore futures import, which coupled with the financial feature of foreign iron ore and the operation of domestic iron ore futures, have shown that iron ore futures is the irresistible trend for all enterprises in the future and enterprises that have the strength and are able to think ahead will grasp this opportunity and enter this market in advance.
With regard to the future operation and development of iron ore futures market, an official of DCE said that DCE will, on the one hand, further train industrial enterprises, especially steel enterprises, and encourage and lead industry customers to actively participate in iron ore futures, and, on the other hand, continue to trace spot market and industry change and further optimize delivery and other business process and improve contracts and rules design according to the circumstance. At present, it will research the internationalization scheme for iron ore futures as soon as it can and actively usher in overseas investors to participate in iron ore futures trading through carrying out bonded delivery and implementing settlement with various currencies, so as to strengthen its service for the industry and its international influence.