DCE adds brands to iron ore futures settlement

China's Dalian Commodity Exchange (DCE) will shift its iron ore physical settlements to a brand-based system in 2020. This will replace existing adjustments based on chemical properties and comes in response to declining Fe levels in the market.

The change will take effect with the September 2020 futures contract "to better serve the industry and promote market functioning," DCE said in a notice.

The new standards add 11 deliverable brands and set their premiums and discounts to be applied for physical settlement. It broadens the range of iron ores allowed by eliminating the upper limit Fe so that 65pc Fe IOCJ fines can be used to settle, and lowers the minimum Fe to include 58pc-grade fines. Two Chinese domestic iron ore concentrates have also been added.

The allowable brands are PBF, NHGF, MACF, JMBF, Roy Hill fines, BRBF, SSF, FBF, IOCJ, HBIS concentrate and Ansteel concentrate.

DCE consulted with the industry about its settlement system, after a popular choice for settlement fell below the exchange's minimum 62pc Fe threshold.

The typical Fe of Australian mining firm BHP's JMBF fell to 59.5pc from 60.3pc in July.

JMBF has been the dominant iron ore brand used for physical settlement in recent months, but it no longer meets DCE's current standards for physical settlement. It will be deliverable under the new standards, as will 58pc segment brands SSF and FBF, and HBIS and Ansteel domestic concentrates. Indian fines, YDF, WPF and RTX are not on the list of allowable brands.

DCE's system has required it to referee physical settlements when traders play the arbitrage between DCE chemical adjustments and spot market valuations. DCE was forced to revise its adjustments after traders used lower-priced Trafigura fines to settle the May 2017 contract. It has limited use of ores that meet the standards, including 61pc Fe RTX. The listing of allowable brands could reduce DCE intervention.

The new standards relax limits for silica and phosphorus but increase the penalty for higher levels of phosphorus. Standards for sizing and trace elements will be eliminated.

DCE may still need to referee physical settlements or closely monitor markets to keep its adjustments accurate. Already its BRBF adjustment of a 20 yuan/t ($2.80/t) premium to the futures contract is well off the market.

BRBF portside prices are flat to PBF, but Yn20/t higher than PBF in DCE's rules, so market participants may buy the BRBF in portside and physically settle it to pocket the difference, a Beijing-based trader said. A similar arbitrage exists for HBIS concentrate, he said.

Argus will update the ranges of iron ore content for its 58pc and ICX 62pc seaborne iron ore indexes on 1 October following a consultation. The range of grades eligible for inclusion in the ICX index will widen to 59-63.5pc Fe from 60-63.5pc Fe. The range of grades eligible for inclusion in the 58pc Fe index will narrow to 56-59pc Fe from 56-60pc Fe.