China's SOE steelmakers to trade Singapore's iron-ore derivatives
SOEs gain approval to trade iron ore futures in Singapore as Beijing's state assets regulator loosens its grip
Chinese state-owned steelmakers are preparing to enter the Singapore-based iron-ore swaps market, in a move that could boost liquidity in iron-ore derivatives as firms look to hedge volatile prices.
Baosteel, China's third-largest steelmaker by output, and Valin, the listed unit of the 10th-biggest steelmaker, Hunan Valin Group, have both won approval to trade iron-ore futures overseas, company officials confirmed.
"There have always been arguments over whether steel mills should trade futures for hedging or not," said Wang Jun, vice-president of state-owned Hunan Valin Steel.
"We don't want the market to become overly speculative, but when the trend is happening, we might have to face it and do it," he said.
Chinese privately owned steelmakers and iron ore traders have already been increasing their use of iron-ore derivatives this year, accounting for up to a third of the volume on the Singapore Exchange's swap contracts in some months, brokers said.
Liquidity jumped rapidly, to 136 million tonnes, in the first half of 2013, traders estimated, compared with 110 million tonnes in all of 2012, but is still dwarfed by the 1.1 billion tonnes of physical seaborne iron ore traded each year.
The Singapore Exchange cleared more than 27 million tonnes of iron-ore derivatives in July, hitting a record high and more than double the 10.4 million tonnes in July 2012.
The popularity of swap contracts has been boosted by a move in 2010 to price iron ore based on indices like the Steel Index or the Metal Bulletin Iron Ore Index, which has increased price volatility.
China consumes more than two-thirds of physical seaborne iron ore, while prices have swung from more than US$190 a tonne in early 2011 to below US$90 a tonne in September last year.
"More and more Chinese companies want to trade futures to manage their risks," said Han Xun, the Steel Index's China manager in Shanghai.
China's Minmetals Corp, a leading state-owned resources trader, has started trading iron-ore swaps. Other privately owned mills that trade the paper include Rizhao Steel, Jiangxi PXSteel Industrial and the largest private firm, Jiangsu Shagang Group, brokers said.
Beijing has kept a tight rein on overseas derivatives trading by state-owned firms, particularly after they lost a combined tens of billions of yuan by trading offshore futures during the global financial crisis.
Previously, only 31 state-owned Chinese firms were allowed to trade futures overseas, mainly for base metals, agriculture products and oil, industry sources said.
Some state-owned enterprises (SOEs) had used their offshore units to trade derivatives, circumventing supervision and currency controls, they said.
More and more Chinese companies want to trade futures
"The government has actually eased its control on SOEs in doing paper now, and firms can get approval easier than before," a senior official at Baosteel said, declining to be named.
While the state-owned steelmakers are preparing to dip a toe in swaps trading, their participation is unlikely to lead to an immediate boost in liquidity due to China's tight regulations on currency conversion.
They also face quotas on how much they can trade and restrictions on how they can trade, said Han.
Valin, which produced about 16 million tonnes of crude steel last year, said it planned to hedge no more than a 10th of the iron ore it consumes a year.
"We are still grooming our team and are currently doing trials," Wang said, without disclosing Valin's quota and annual consumption.
The lessons learned would help the companies when the China Dalian Commodity Exchange launched its own iron-ore futures contract later this year, traders said.
Dalian will rival the Singapore Exchange, which dominates the iron-ore paper market by clearing more than 90 per cent of swap volumes, and the CME Group's iron-ore futures.
