China launches iron ore contract for foreign investors

A worker cutting steel in Qingdao on Jan 17. China opened iron ore futures to foreigners in a bid to boost its pricing clout.
A worker cutting steel in Qingdao on Jan 17. China opened iron ore futures to foreigners in a bid to boost its pricing clout.PHOTO: AGENCE FRANCE-PRESSE

DALIAN • China plans to open more of its futures contracts to foreign investors, a senior official said yesterday, as Beijing launched its "internationalised" iron ore contract, part of a bid to boost its sway over the pricing of major commodity imports.

Global merchants Glencore and Trafigura were among the first foreign firms to trade iron ore yesterday, although they have long had access to the contract through local entities. The change means foreign companies will be able to trade directly, opening the market to more participants.

Iron ore is the second commodity China has opened to outside investors following the launching of a crude oil futures contract in March that aims to compete with rival global benchmarks.

The move is expected to increase trading in the Dalian Commodity Exchange's iron ore contract, which was launched in 2013 and is already among China's most liquid derivatives, with volumes far surpassing shipments of global seaborne iron ore trade. "We will accelerate the process to attract more foreign investors," Mr Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, told a packed crowd on the trading floor of the Dalian exchange.

"We will internationalise all the mature futures contracts and expand Chinese influence," he said.

The most actively traded September iron ore contract closed down 1.2 per cent at 471.50 yuan a tonne, retreating from a two-day spike that pushed it to a more than one-week high on Thursday.

Unlike oil, gold and copper, for which prices are set in London and New York, iron ore is one of the few commodities whose global pricing takes its cue from China. Prices there virtually dictate the path for the physical market.

Volume for the most-traded contract reached almost 2.9 million lots, just surpassing April's daily average of 2.8 million lots.

The strong liquidity in China's markets is a strength in its bid to be a price setter. Trading volumes in its crude oil futures have outpaced turnover on the rival Brent and the US West Texas Intermediate contracts during Asian hours since its March 26 launch.

But the huge volumes also make China's iron ore contract a magnet for speculative retail investors, who have triggered wild price swings and prompted regulators to impose trading curbs over the past two years.

Unlike oil, gold and copper, for which prices are set in London and New York, iron ore is one of the few commodities whose global pricing takes its cue from China.

Prices there virtually dictate the path for the physical market. Last year, Dalian iron ore volumes reached nearly 33 billion tonnes versus global annual iron ore trade of about 1.5 billion tonnes.

"Finally the barrier is gone," Mr Lee Kirk, managing director at Cargill Metals, said at the Dalian event, although traders pointed to issues that could keep some Western players on the sidelines. Unlike other global benchmarks that trade on consecutive months, the liquidity in Chinese commodity futures tends to focus on a specific month due to a different cost structure, which could favour Dalian rival Singapore Exchange, said Mr Kirk.

Prospective players may also be wary of currency exchange, said Trafigura trader Micky Richmond.

"Lots of US hedge funds have shown interest in Dalian iron ore trade and the Chinese market... But I think it's difficult for them, because of the margin situation and monetary situation, it's hard to exchange between the US dollar and Chinese yuan," he said.

Miners typically don't hedge or fix prices for future sales because that means their earnings can be lower if prices increase.

Japanese trading house Mitsubishi Corp, which trades iron ore derivatives on the Singapore Exchange, is among those holding off on Dalian.

"I think the volatility may go smaller at the beginning, when foreign spot traders test the waters. But it could go bigger again if they decide to stand by and more speculators come in,"said Mr Jin Yuandong who works at Mitsubishi's metals business.

REUTERS

A version of this article appeared in the print edition of The Straits Times on May 05, 2018, with the headline 'China launches iron ore contract for foreign investors'. Print Edition | Subscribe