Dalian Commodity Exchange (DCE) disclosed its “China-version” iron ore futures contract at the Training Class of Iron Ore Futures hosted by the China Iron and Steel Association (CISA) in Dalian on June 27. According to the contract, physical delivery will be completed with imported iron ore meal which contains 62% of iron as trading objects, and iron ore fines is allowed to replace in the delivery.
The international iron ore derivatives index mode is questioned by the market, and physical delivery is the most impressive feature of DCE’s “China-version” iron ore.
According to experts from the DCE Industrial Department, the Singapore Exchange, the London Clearing House, Intercontinental Exchange, and the Chicago Mercantile Exchange, etc. have been introduced iron ore swaps since the Deutsche Bank launched the world’s first iron ore swap contracts in 2008; from 2011 on, the Chicago Mercantile Exchange and Singapore Exchange launched swap options; in January 2011, the Indian Commodity Exchange launched the first iron ore futures, and in August at the same year, the Singapore Commodity Exchange launched iron ore futures, since April this year the Singapore Exchange and the Chicago Mercantile Exchange also launched iron ore futures; in May, the Intercontinental Exchange and the London Metal Exchange announced the launch of iron ore futures. It clearly showed that heated competition of iron ore derivatives in the international market has taken place. This has also forced China, the world’s largest iron ore importer, to launch related futures as soon as possible.
All the iron ore futures contracts that have been launched in the global market are iron ore index futures. The fundamental reason is the lack of appropriate support from spot markets in relevant areas, which has led to disability of physical delivery. As the world’s largest iron ore importer, China has great spot market; therefore, DCE’s “China-version” iron ore futures applies physical delivery which is commonly seen in the global market.
In this class, market insiders said that the physically delivered domestic iron ore futures have advantages over those index varieties in the global market. Currently, the establishment and sample collecting of international iron ore index is widely believed as unscientific and unreasonable. According to Director Wang Yingsheng of the CISA Market Research Department, 80%-90% of the current production of the major three international iron ore producers is based priced with the Platts index, and the remaining 10% -20% is sold through tender or spot platform, and the Platts index is based on the tender prices of the three major producers. Due to the low number of constituents, and the undisclosed preparation mode and tender process of the major three producers, the transparency of Platts index has been widely questioned, and further research is needed to see whether it is manipulated. Sources said that the iron ore price hike at the beginning of this year was the result of the tender price rise of a ship one day. The iron ore index futures are over-relied on the index, which will further enhance the mining companies’ control of the market.
However, physical delivery can greatly reduce the chance for these major producers to manipulate the market. Physical delivery is effective in bringing futures closer to the spot, which can better reflect the supply and demand in the spot market and avoid index futures reflecting wrong supply-demand due to passive following of index. Being controllable in terms of market risks and delivery costs, iron ore futures can be standardized and physically delivered without any trouble. DCE has accumulated rich experience in the delivery and transaction of bulk, such as coke and coking coal, which has laid solid foundation for the listing, transaction, and physical delivery of iron ore futures.
The “China-version” iron ore futures contract will be carried out with imported iron ore meal which contains 62% of iron as the trading target.
It is said that in terms of the contract design, DCE has come up with a scientific and reasonable “China-version” iron ore futures contract characterized by less speculation, low risk, steady operation, and efficiency, the result of taking the low price of iron ores, bulk, and the special market structure into consideration.
With regard to determining the contract trading object, as most of China’s large mines are generally owned by steel mills, the major risk in the iron ore market faced by steel mills is from the imported ore; and as their traders are mostly concentrated in imported ore, DCE has, from the perspective of serving the industry, chosen the imported crude iron powder with the iron content of 62% as the trading object, which is most typical in price in China’s consuming and trading and that most needs risk-avoiding. Meanwhile, the refined iron powder is allowed to replace the crude powder for delivery and the iron ore with the iron content of above 60% is also allowed for delivery by setting the premium and discount standards of iron, silicon, aluminum, sulfur, and phosphorus. The adoption of the combined indicator system of “general trading indicator + microelement” will differentiate the mainstream high-quality ore with the non-mainstream low-quality one, thus making the futures prices much clearer. At the same time, such combined systems as introducing refined powder to expand the coverage of delivery objects and combining the approval of hedging and the strictly limitation of position will further reduce the influence of the tree major ore traders on futures market.
Given the production and consumption volume of iron ore in a year are rather even and for the convenience of investors’ arbitraging between relevant varieties, DCE has established 12 contract months in a year and set the contract volume as 100 tons per lot and the delivery unit as 10,000 tons.
As the iron ore is a low-value commodity, the delivery of iron ore futures should implement both the warehouse receipt delivery system and the manifest delivery system to effectively reduce the delivery cost. One month before the delivery, the buyer presents the demand and the seller responds accordingly; after paired by the DCE, the two sides can directly finish the delivery of goods during the ship-unloading according to specified procedures. Such method can allow the buy and the seller directly trade with each other and avoid the storage and re-transferring, thus making futures delivery almost the same as the real conditions of actuals and effectively reducing the delivery cost of both sides.
Enterprises call for the listing of iron ore futures in domestic market as soon as possible.
In order to make the futures contracts and systems as close as possible to the spot goods and give full play to the industry’s service function, during the development of new varieties, DCE has solicited opinions from all industry parties, communicated and reported to the industry association and relevant state ministries/commissions several times, and organized the industrial enterprises training class and the contract demonstration conferences. At present, relevant ministries and commissions and industry organizations has clearly shown their support for the launching of iron ore futures, believing that “it is better listed in China than in foreign countries” and “it is better early listed than late”. At the steel mills training class and contract demonstration conference held by DCE a few days ago, China’s large steel enterprises, including such international ore traders as the Rio Tinto Group and the Broken Hill Proprietary Billiton Ltd., have all shown their approval and recognition for DCE’s iron ore contracts and rules, and domestic enterprises have called for the listing of China’s iron ore futures as soon as possible so as to help enterprises avoid risks and protect the industry’s stable and healthy development.
Market participants also pointed out that in recent years, especially this year, the international derivative exchanges have developed iron ore futures product one after another and, as the international iron ore market’s pricing mechanism has not been completely formed and spot enterprises have doubts on Platts price index, they hope to grasp this opportunity to develop their iron ore futures and receive market recognition, thus becoming the base market for international iron ore pricing. The competition in iron ore derivatives in the international market has exerted great impact on China’s market. On the one hand, once a certain international market becomes the center for iron ore derivatives exchange, it will soon become the global iron ore pricing center. As a result, China’s enterprises have to refer to foreign markets when fixing the price, which is extremely unfavorable to China, the largest consumer and trader in global iron ore market. On the other hand, many domestic enterprises with the need of hedging have participated in international derivatives market through various methods. It is known that many domestic steel mills and traders have already registered in Singapore for the convenience of conducting hedging. One Singapore’s local broker said that about 50 Chinese customers have opened an account in his company for trading.
“Relevant foreign exchanges have put forward iron ore futures contracts successively. However, China’s steel mills and traders’ large numbers of imported iron ore has no corresponding risk hedging instruments, which will make them lose some right of speech in the future competition for iron ore pricing power.” said Liu Yuan, Senior Manager of Shanghai Ganglian Electronic Business Co., Ltd.
Wang Xiaoqi, Vice President of CISA, announced in his speech at this training class that DCE has applied for listing at China Securities Regulatory Commission (CSRC) and CISA has replied their support for DCE’s launching of iron ore futures. That day, Li Zhengqiang, President & CEO of DCE, also said that the iron ore is not only a strategic product pushed by DCE to be listed but also one of the four major strategic products vigorously pushed by CSRC to get listed. Currently all market participants have reached the consensus on the launching of the iron ore futures, and since DCE’s project of iron ore futures was approved by CSRC last year, DCE has been vigorously pushing forward the listing of the product. Both of their announcements show that the listing of the iron ore futures might not be far away from us.