October 18, 2013 / 3:10 AM / in 4 years

UPDATE 2-China iron ore futures debut briskly, back pricing clout push

* Volume for most-active contract at around 15 mln tonnes

* Dalian iron ore futures jump nearly 2 pct

* Iron ore is 4th commodities futures that China launched this year

By Manolo Serapio Jr and Ruby Lian

SINGAPORE/SHANGHAI Oct 18 (Reuters) - China’s first iron ore futures debuted in heavy trade on Friday, boosting Beijing’s push to obtain a bigger say in pricing the world’s No. 2 traded commodity after oil.

The futures launched by the Dalian Commodity Exchange will give Chinese steel mills, the world’s top buyers of iron ore, an alternative reference price for their purchases currently based on index prices computed off a small proportion of China’s spot transactions.

Beijing has not been shy about its distrust of index pricing or of iron ore prices from data providers Platts and Metal Bulletin . Only last month, a senior official of the China Iron and Steel Association claimed big miners were reducing volumes sold through spot tenders in order to push up global index prices.

The Dalian contract is the world’s first iron ore futures that is backed by physical delivery, and being denominated in yuan it can easily draw on the massive untapped hedging potential in China.

China’s big steelmakers Baosteel, Angang and privately owned Shagang, as well as domestic traders and institutions have all indicated their interest in the Dalian futures, industry sources said.

“Today’s opening and trading volume point to a good start for the new futures, and a lot of institutional and industry investors have shown strong interest in the tool,” said Fu Yang, an analyst with Guotai Junan Futures in Shanghai.

“The contract should help China gain more influence in pricing iron ore in the long run, though this will not happen soon.”

Volume on the Dalian exchange for the most-active May iron ore contract hit 300,818 lots, around the same first-day level for recent futures contracts that China launched such as thermal coal and bitumen.

The traded volume is equivalent to about 15 million tonnes. By comparison, top global iron ore swaps clearer Singapore Exchange handled a total 20.4 million tonnes in all of September.

The May contract opened at 978 yuan ($160) a tonne versus the base price set at 960 yuan, touching a high of 984 yuan, before closing at 977 yuan, up 1.8 percent.

The base price of 960 yuan, stripping out value-added tax and other costs, is equivalent to about $129-$130 a tonne for imported 62 percent grade iron ore cargo that includes freight cost, traders said.

The price compares to the current industry benchmark of $134.40 a tonne for the same 62 percent grade on Thursday, based on data from Platts-owned Steel Index.


Dalian’s iron ore is the fourth commodities futures product that China has introduced this year. The world’s first futures in road-paving material bitumen was launched in Shanghai to strong volumes just last week.

Besides wanting more influence over global commodity prices, the launches signal a gradual opening up of China’s financial sector as it moves towards a consumption-oriented growth model.

The Dalian iron ore futures could pose a threat to the $28 billion swaps market in the commodity by exploiting hedging potential in China without the trading restrictions that have been a challenge for the global swaps market trying to tap Chinese flows.

The price moves in Dalian caught swaps traders off guard on Friday, with the May futures, which closed at the equivalent of around $133 in Dalian, at a premium over the May swaps contract which settled at $123.25 on Thursday, traders said.

“If I were a miner right now and I could sell May next year at that price, that’s quite a good price versus swaps,” said a Singapore-based broker.

Spot sale tenders held by global miners such as Rio Tinto and BHP Billiton help determine the benchmark prices provided by Platts and Metal Bulletin.

Foreign companies and banks can trade Chinese commodities futures through local units that are registered in the country.

“I think Vale, Rio and BHP will get involved in this. The liquidity of this product would be better than iron ore swaps in the future,” said an iron ore trader in Shanghai.

But he said it may be difficult for the market to consider the Dalian contracts as benchmark given that they are denominated in yuan that is not traded freely like the U.S. dollar.

China consumes more than 60 percent of global seaborne iron ore and last year imported a record 744 million tonnes. Rio, BHP and Brazil’s Vale together control around two-thirds of the 1-billion-tonne-plus seaborne market.

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