May 4, 2015 / 5:47 PM / 4 years ago

Record China iron ore futures hold global market hostage

A worker operates an excavator on a pile of iron ore at the dump site of a port in Lianyungang, Jiangsu province, January 12, 2015. REUTERS/China Daily

SINGAPORE, May 4 (Reuters) - Iron ore miners from Australia to Brazil stood helpless last month as Chinese speculators first bought and then sold a record volume of Dalian iron ore futures, sending global prices on a roller-coaster ride.

The volume of iron ore futures traded on the Dalian bourse reached 18.6 million contracts in April, equivalent to 1.86 billion tonnes, according to data on the exchange’s website. That was a monthly record, and far surpassed annual global sea-borne trade of around 1.4 billion tonnes. The deals were driven by hundreds of domestic private funds, which went long on Dalian iron ore futures as Chinese steel mills replenished run-down inventories of the raw material. The funds later sold when they viewed the market as overbought. Foreign companies are not allowed to invest directly in Chinese commodity futures unless they have units registered in China.

The global benchmark spot price spiked 27 percent from a decade low of $46.70 a tonne in a span of three weeks as Dalian futures climbed nearly 20 percent, surprising a market hit hard by a global supply glut. But the rally halted last week when Dalian futures went into retreat.

Dalian futures were launched in October 2013 and gave many Chinese investors their first real chance to play in the iron ore futures market. Volumes on the Chinese exchange picked up especially as Beijing kept a tight rein on overseas derivatives trading by state-owned firms after some of them lost billions of dollars in offshore futures during the 2008-09 global financial crisis.

In contrast to Dalian’s record deals, the Singapore Exchange, the next most liquid iron ore derivatives market in the world, the volume of iron ore swaps, futures and options merely topped 78 million tonnes last month. “The influence of Dalian futures has increased over the last two years because it’s got more participation from traders and some steel makers,” said Wang Li, analyst at CRU Group in Beijing. “The biggest physical market for iron ore is in China, and the iron ore futures have been representative of this physical market.”

Editing by Ryan Woo

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