Singapore, 1 July (Argus) — China's Dalian Commodities Exchange (DCE) is working on introducing a futures contract for imported 62pc Fe grade iron ore.
It is “imperative” for China to urgently introduce iron ore futures, because several international exchanges are already trading in derivatives for the steelmaking commodity, DCE said. China is the largest import market for iron ore.
Dalian's iron ore contract will be a futures contract based on a warehouse-based physical delivery system. Other countries, such as Singapore, have primarily introduced cash-settled iron ore index-based derivatives because of a lack of a domestic spot market and physical delivery capabilities.
A convergence between physical and future iron ore prices in a physical delivery-based model would curb speculation and more closely align prices with supply and demand fundamentals in the Chinese physical market. Dalian ultimately plans to establish an iron ore price benchmark that gains global acceptance.
Australian or Brazilian mining firms may struggle to accept yuan-denominated contracts as a pricing benchmark. Taxes and restrictions on transferring profits outside China would discourage international companies from trading on the DCE, traders said. If Dalian's track record with other commodities, including the recently-launched coking coal futures contract, is any indicator, it would be an actively traded futures product in China and could offer traders valuable arbitrage opportunities with regard to other globally traded iron ore derivatives.
Dalian's 62pc Fe contract will allow premiums and discounts to be offered for different values of impurities such as silicon, aluminum, sulphur and phosphorus, making it possible for non-mainstream cargoes to be part of the contract. The minimum Fe level for inclusion in the 62pc Fe grade will be 60pc. Contract size is expected to be 100t, while minimum physical delivery amount will be 10,000t.
A benchmark will allow Chinese steel companies that have opened offices in Singapore to hedge their risks in the derivatives market do the same in China. DCE is conducting training courses for market participants, including steel mills and mining firms, on the forthcoming futures contract, which is supported by Chinese iron and steel association Cisa and the government. DCE did not give a timeframe for launching the contract.
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