Dalian exchange off to a good start

Only time will tell whether the iron-ore futures will reduce clout of big miners

PUBLISHED : Monday, 04 November, 2013, 5:49am
UPDATED : Monday, 04 November, 2013, 3:05pm

It has been two weeks since the mainland's first iron-ore futures contract started trading. So far, volumes and open interest are robust and prices are slightly lower.

For the authorities in Beijing, it is a case of "so far, so good" for their goal of gaining more control over the pricing of the steel-making ingredient from the Big Three mining companies that dominate global trade.

However, even though the Dalian Commodity Exchange (DCE) contracts have been well received, it is way too early to say they are the start of a successful revolution for the way iron ore is traded on the mainland, which buys about two-thirds of global seaborne cargoes.

What we have learnt since the DCE launched the iron-ore futures on October 18 is that there is significant interest in hedging and trading within the mainland's steel community.

While traders report there is interest from major domestic steel companies such as Baosteel and Angang, so far the bulk of volume seems to be coming from smaller traders and speculators.

This is because the small size of each lot, namely 100 tonnes, is attractive to less well-capitalised players and the bigger players tend to be institutionally cautious and are waiting to see how well the market works.

The DCE is confident it can ensure the quality of delivered cargoes and the timeliness of delivery, but some likely participants will wait to see if this is indeed the case. It is likely that the major producers, the Anglo-Australian pair of Rio Tinto and BHP Billiton and Brazil's Vale, will also be cautious.

It is also likely that Rio and BHP will only use the DCE contracts when the arbitrage is in their favour, for example if they can sell on the DCE while buying swaps on the Singapore Exchange (SGX) and make a profit.

Given its strong start, it is entirely possible that the DCE will overwhelm the SGX on a volumes basis, but this is only because it will attract large numbers of mainland players, which are restricted from trading abroad.

The DCE contracts will also give mainland steel mills and other buyers another reference price other than those from data providers Platts and Metal Bulletin. Their real value is that they provide more transparency in the market, and because they are deliverable, they should do much to combat accusations of market manipulation.