China takes a step toward global iron ore pricing power

bloomberg.com General,  Policy,  Iron Ore,  futures 2018-05-04 14:17:00

China, which purchases iron ore from around the globe to feed the world's biggest steel industry, is opening its domestic futures market to international investors. It's the latest step toward liberating its financial markets and another push to gain greater power over the pricing of key commodities. When trading begins on May 4 in Dalian, iron ore will become only the second yuan-denominated Chinese commodities market open to the world following the start of oil futures trading in Shanghai in March.

 

1. Why is this important for China?

Chinese policy makers have long said they want to develop futures markets as hubs for setting prices – using the country's commercial heft to achieve a greater say in determining the cost of materials. In iron ore's case, it aims to challenge benchmark prices provided by platforms such as Singapore Exchange Ltd. and Platts. The Dalian Commodity Exchange, where China's futures are traded, is “opening the market to increase the credibility of the price and its profile as a global benchmark, enabling it to reflect world supply and demand in a more accurate and objective way,” it says on its website.

 

2. How is iron ore priced?

Until 2010, prices were set largely through annual contracts in private negotiations between suppliers and their biggest customers, for decades chiefly in Japan. The system broke down as the price for immediate delivery rose higher and higher above the annual level on the back of surging Chinese demand, and now shorter-term contracts use reference prices that are set daily. The market for iron ore is bigger than for any other commodity except oil and gas. Prices that soared amid China's rapid urbanization are now at about one third the level of their peak in 2011.

 

3. Could yuan-denominated ore become a global benchmark?

Although it's too early to say, there's no doubt that China is where the action is: It absorbs 70% of the global seaborne iron ore trade. But Dalian has some catching up to do. Singapore Exchange probably had the greatest influence on the global market, according to a Goldman Sachs Group Inc. study in 2016. That said, Singapore's facing competition not only from Dalian but from a product in Hong Kong that was launched late last year.

 

4. How active is trading in iron ore futures?

Steel and iron ore products were the two most traded commodity categories in China last year. Transactions in Dalian iron ore accounted for 11% of the total volume in Chinese commodities futures. That's partly explained by the fact that individual investors play a far bigger role than in other markets, boosting trading volume but bringing with them far greater volatility. Speculation became so frenzied in 2016 that daily trading volumes at times exceeded the country's annual imports. In 2017, almost 32.9 billion tonnes of Dalian iron ore contracts changed hands – compared with annual imports of about 1 billion tonnes – with a total value of 17 trillion yuan ($2.7 trillion), according to China Futures Association.

 

5. Will foreigners buy Chinese iron ore futures?

That remains to be seen. Overseas miners and traders would need to swallow not just China's penchant for occasional market interventions – as happened with commodities including iron ore in 2016 – but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Still, the early signs are that China's nascent crude oil futures market is being used as intended as a physical market and not by speculators.

 

6. How do overseas investors trade in Dalian and when?

Qualified foreign traders need to open accounts at Chinese domestic brokerages. They can also trade and settle through qualified overseas intermediaries with ties to Chinese futures companies. Foreign traders and brokerages can use dollars as margin to trade in the products, which are settled in yuan. Daytime trading hours will be from 9 a.m. to 10:15 a.m., 10:30 a.m. to 11:30 a.m. and 1:30 p.m. to 3 p.m. local time and at night from 9 p.m. through 11:30 p.m. Unlike futures contracts listed in Singapore, which are settled in cash, the Dalian Commodity Exchange allows traders to settle expiring contracts only by taking or delivering physical iron ore in registered warehouses.

(Writing by Alex Guo  Editing by Tammy Yang)
For any questions, please contact us by inqury@fwenergy.com or +86-351-7219322.

Share this article
Connect with us

Editors Recommendations

1 Weekly global coal market news summary (May 21 – May 25) 2018-05-25

Mongolia plans to launch $16 billion investment programme Mongolia is preparing to invite proposals for public-private partnerships that would make a combined 38.3 trillion tugrik ($15.95 bil

2 China Coal initiatively reduces price in response to NDRC policy 2018-05-25

China National Coal Group, the country's second largest coal miner, reportedly pared supply prices initiatively, in response to measures issued by the National Development and Reform Commission (ND

3 Chinese thermal coal market tilts down as govt policy measures kick in 2018-05-25

China's domestic thermal coal prices are set to drop from recent highs, as a slew of government policy measures kick in to cool down the red-hot market. The National Development an

4 Policy regulation aggravates sentiment in China thermal coal market 2018-05-25

Chinese authorities' countermeasures to stabilize thermal coal prices have aggravated wait-and-see sentiment in the domestic spot market. Preemptive traders started to conclude deals at a lower price,

5 China hydropower picking up in May, coal burns will go down gradually 2018-05-25

China's hydropower generation totaled 68.08 TWh over May 1-23, increasing 5.25% on the year, up 10.5 percentage points from the negative growth in April, data showed. Daily hydro

6 Chinese coke makers, traders concerned about downward risk after five hikes 2018-05-25

China's coke producers are concerned about the downward risk after the fifth price increase of 100 yuan/t starting May 23, sources said. Prices of the steel making material has gon

7 China's coke price up 5.2pct in mid-May, NBS 2018-05-25

Prices for China's Grade II met coke averaged 1,753.5 yuan/t in middle of May (May 11-20), rising 5.2% or 86.7 yuan/t from ten days ago, according to the sampling survey by the National Bureau of Stat

8 China urges EU to act 'prudent' on steel trade 2018-05-25

The European Union's frequent trade remedy investigations into China's steel products have seriously interfered with steel trade between the two economies, the Ministry of Commerce said on May 24, urg

9 China Apr thermal coal imports down 28.12% on mth 2018-05-24

China imported 9 million tonnes of thermal coal (bituminous and sub-bituminous) in April, tumbling 3.52 million tonnes or 28.12% from the preceding month and 0.78 million tonnes or 7.98% year on yea

10 China Coal Daily Track (May 24) 2018-05-24

Thermal coal Domestic market Price increments of slack thermal coal were maintained at 5-10 yuan/t recently at main production areas. Purchase sentiment of traders faded a little aft

Most Read Articles

1 N Korea intends to export coal to China after a diplomatic breakthrough with US 2018-05-16

Some North Korean traders were offering low-price coal to Chinese traders and have stored up a number of cargoes at North Korean ports, expecting to deliver them over the border when a diplomatic brea

2 China thermal coal market faces downward risks in short run 2018-05-16

Despite unexpected price rallies amid current slack season, China's thermal coal market at Bohai-rim ports is still facing downward risks in the short term, given little improvement of demand from uti

3 China Apr raw coal output up 4.1pct YoY, NBS 2018-05-15

China produced 293.3 million tonnes of raw coal in April, an increase of 4.1% year on year, showed data from the National Bureau of Statistics (NBS) on May 15. Over January-April, raw coa

4 Intensified environmental crackdown may cause new capacity cuts in China coke industry 2018-05-14

A new round of capacity cutback may stage in China's coke-making industry, as increasingly stringent environmental checks force producers to limit output. The move was led by Xuzhou

5 China's May coal imports may stay stable from Apr 2018-05-15

China's coal imports in May are expected to stay stable from the level recorded in April this year, as relevant authorities seemed to be less strict in banning import coal following continuous price r

6 As temperatures soar, China coal traders bet on shortages 2018-05-17

China's thermal coal futures rose to a six-week high on May 16 as traders bet on a supply crunch as lower hydro power output and forecasts of a summer heat wave spurred expectations of rising demand f

7 India's thermal coal imports rise over 15% in Q1 2018-05-14

India's thermal coal imports rose by more than 15% in the first three months of 2018, with Indonesia accounting for about three-fifths of total supplies, according to vessel arrival data from Dubai-ba

8 Notice on website upgrading 2018-05-17

Sxcoal.com will be undergoing upgrades on Saturday May 19, 2018, to bring you enhanced stability and improved experience. From 9:00-15:00 Beijing Time (GMT+8), you may experience intermitt

9 China's top 3 provinces contribute 67.5% of raw coal output in Jan-Apr 2018-05-17

Northern China's Inner Mongolia, Shanxi and Shaanxi produced 67.5% of the country's total raw coal in the first four months, showed data from the National Bureau of Statistics (NBS). On M

10 China spot thermal coal market further ascends; worries linger on 2018-05-17

China's thermal coal market continued ascending at Bohai-rim ports following latest quick pick-ups, with offer prices jumping even higher on a lack of supply. Yet participants' worries over downside r