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China opens up iron ore futures to foreign traders

05 Feb 2018 05:03 GMT
China opens up iron ore futures to foreign traders

Singapore, 5 February (Argus) — The Chinese government has allowed overseas organisations to participate in domestic iron ore futures traded on the Dalian commodities exchange (DCE).

The approval puts the yuan-denominated iron ore futures on track to be the first commodity to be opened up for international participants, contrary to expectations that crude futures will lead the way in internationalising China's futures market.

The DCE will seek public opinion on the best way to internationalise the iron ore futures market, which currently comprises the 62pc Fe fines contract. The specifications for the Dalian contract are 62pc Fe, 4pc silica, 2.5pc alumina, 0.07pc phosphorus and sulphur at 0.03pc.

Overseas participants could trade through existing domestic trading members of the exchange while overseas broking firms could be initially allowed to venture into iron ore futures trading. Overseas trading firms may need to open yuan-denominated and dollar-denominated bank accounts with designated Chinese banks to settle positions. The foreign currencies allowed to be brought in for futures trading are the US dollar and offshore yuan.

The DCE has emerged as a key influence on iron ore pricing in the physical market with most steel mills and trading firms using the exchange to hedge and speculate, apart from participation by several financial institutions. The futures market has a strong co-relation with the yuan-denominated portside market for imported ores, where prices often fluctuate through the day tracking the futures trend. Argus started daily assessment of the portside imported iron ore market in September, publishing its key 62pc price PCX and differentials to PB fines, SSF fines, Newman fines and BRBF fines.

The international iron ore futures trade is currently centred at the Singapore-based SGX that trades dollar-denominated swaps. Internationalisation of yuan futures is unlikely to dent volumes at the SGX unless Dalian allows dollar-denominated trading.

Unlike the SGX, Dalian allows delivery of physical iron ore as a mode of settling contracts. Bonded warehouses across China will allow overseas trading firms to take delivery of iron ore.