China's planned iron-futures a threat to swaps market
The contract by Dalian Commodity Exchange can access massive untapped hedging potential
China's imminent launch of its first iron ore futures contract could pose a threat to the US$28 billion swaps market by exploiting huge untapped hedging potential at home.
The contract to be offered by the Dalian Commodity Exchange likely before the end of the year will be China's latest stab at boosting its power to price the world's second-largest traded commodity after oil as a more volatile iron ore market exposes its steel mills to more risks.
By being the first yuan-denominated iron ore futures contract, the Dalian exchange can easily draw on the growing hedging appetite in China, a market that bourses in Singapore, the United States and Europe have been trying to tap for years.
Beijing has kept a tight rein on overseas derivatives trading by state-owned firms after many lost billions of dollars in offshore futures during the global financial crisis. The lack of a domestic hedging tool has led Chinese companies to increase their use of the US dollar-denominated cash-settled swaps offered by the Singapore Exchange (SGX) and CME Group.
Beijing hopes to gain more pricing power via its own futures
"The market is in China. So Dalian's futures will attract a big number of domestic companies because this can help them avoid currency volatilities and restrictions which is a big challenge to Singapore's swaps," said Zhao Qian, a senior broker with Citic Securities Futures in Shanghai. "In the longer term, Beijing hopes to gain more pricing power via its own futures and it is hoping it can become a market benchmark."
China buys at least 60 per cent of the world's seaborne iron ore and last year that reached a record 744 million tonnes, almost seven times the size of swaps cleared by the Singapore Exchange, pointing to the huge hedging opportunity in China.