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BEIJING/SHANGHAI, July 14 (Reuters) - China’s central bank has approved the launch of the country’s first iron ore and thermal coal swap contracts, two industry sources said on Monday, giving industry participants new financial tools to hedge the risk of volatile prices.
China is the world’s top iron ore and coal consumer. The launch of the two swap contracts marks China’s latest effort to gain influence over the benchmark pricing of a key commodity.
The move could pose a threat to the cash-settled iron ore and thermal coal swaps contracts cleared by the Singapore Exchange and CME Group.
The new contracts will be priced in the yuan and trade over the counter, with clearing handled by the Shanghai Clearing House, said two industry sources familiar with the matter.
“The two contracts will be launched soon and will be rolled out at the same time,” said one of the sources, who declined to be identified as he was not authorised to speak to the media.
The People’s Bank of China could not be reached for comment.
The swap contract for iron ore with 62 percent content will be priced against a combination of reference indices published by information providers CUSteel, China Beijing International Mining Exchange and Mysteel.
The thermal coal contract will be based on the government-backed Bohai-Bay Rim Steam Coal index.
A swap contract is a cash-settled derivative between a seller and a buyer at a fixed price for a set amount of time, providing price certainty for both parties on the underlying commodity.
China buys at least 60 percent of the world’s seaborne iron ore and last year imported a record 820 million tonnes, multiple times the volume of iron ore swaps cleared by the Singapore Exchange, highlighting the huge hedging opportunity in China.
China’s total coal imports stood at 330 million tonnes last year and accounts for about a quarter of global trade.
Reporting by Coco Li and Fayen Wong; Editing by Tom Hogue