Iron Ore Trading in Foreign Capital to Start In China Soon
Ferro-Alloys.com: Northern Province Liaoning will witness the opening of China's Dalian Commodity Exchange (DCE) for the iron ore futures trading to foreign capital from 4th May, as per the Beijing’s effort to exercise U.S Dollars dominated commodity pricing.
After the crude oil futures in March, this will become the second Chinese commodity derivatives market to allow overseas investment. The foreign investors are hesitant to accept Beijing's invite, as the country's turbulent financial sector remains an uncertain prospect for outsiders, despite recent pledges of greater transparency.
According to a Japan based Iron Ore trader, the company prefers to trade via Singapore Exchange. He thinks the Singapore Exchange is far better for physical demand-supply than Dalian. Furthermore he said he said the Chinese derivatives market was dominated by individual speculators, and can thus be very volatile. It is therefore not a good place for steel mills and traders to hedge risks for now, he said. But the company is watching price movements on the Dalian exchange, and may invest in the future once it builds enough liquidity.
Such concerns are shared by Takayuki Honma, senior economist at Sumitomo Corporation Global Research, who expects volatility and a lack of liquidity to keep most Japanese trading firms away from the Dalian exchange in the medium term.
However, he said the Chinese government might instruct steel mills to use more domestic iron ore and cut consumption of imports to set a benchmark for Asia, pushing the mills to the Dalian futures market to hedge risks.
China is the world's largest iron ore consumer, importing 1.075 billion metric tons in 2017, accounting for more than 60% of the world's total seaborne iron ore trade.
But Chinese companies have had very limited bargaining power, as international trade in the commodity is largely denominated in U.S. dollars, and steel production in China has been widely dispersed due to the large number of small players.
The DCE says introducing foreign investors into the domestic iron ore futures market will help develop a widely accepted price benchmark and spur global iron ore trade, according to Xinhua.
According to the latest rules, futures trading on the Chinese exchange will be priced and settled in Chinese yuan, but foreign participants are allowed to make deposits in U.S. dollars.