China is brewing to launch domestic iron ore futures controversy

The iron ore financialization tempted the market to hedge the high price of gold, which led to the expansion of the overseas iron ore derivatives market. China is brewing domestic iron ore futures, but whether it can take the initiative in the tide of ore financialization, there are still some variables in promoting the establishment of iron ore spot trading platform, China once again actively seek change in the evolution of ore price formation mechanism . On October 12th, the topic “Research on the impact of iron ore futures on the development of China's steel industry” was completed in Beijing. The conclusion will be held in the form of a closed-door meeting. An official of the National Development and Reform Commission said that it is better to form a consensus in many parties and that the conditions for launching domestic iron ore futures are gradually maturing. According to the Dalian Commodity Exchange (hereinafter referred to as the “Da Shang Institute”), the iron ore futures business research has been approved by the China Securities Regulatory Commission, and the next step will be to design the system and compare the plans. China's iron ore finance business is on the line. Since the long-term agreement price mechanism that has been delayed for 40 years has been broken, the rate of iron ore financialization has accelerated year by year. In September this year, the Singapore Exchange (Singapore Exchange, hereinafter referred to as the SGX) iron ore swap business has reached 17.074 million tons in a single month, which is dozens of times the beginning of the market in 2009. The overseas iron ore derivatives market has expanded rapidly, reflecting the huge market demand for safe havens. A number of overseas financial institutions, including the SGX, are actively promoting iron ore swaps in China, and the number of domestic companies participating in them is increasing. This also forced China to launch iron ore futures as soon as possible, otherwise it may lose the initiative in the process of ore financialization, but the uncertain risks are also cause for concern. Swaps in the iron ore circle in China, every major industry conference has a market vane, many manufacturers, traders, steel mills are rarely absent. At the end of September, the China Iron and Steel Industry Association hosted an international seminar on China's steel raw materials. Compared with a year ago, the spot market price of iron ore fell from a high of 180 US dollars per ton to “waist”. The shadow of the fall in the price of gold in the 2008 financial crisis once again shrouded the market. At the meeting, financial institutions promoting the iron ore derivatives business became the focus. The SGX, the Chicago Mercantile Exchange (CME Group), and the Freight Investor Services (FIS) are listed separately. The staff who traveled from overseas used the standard Mandarin as much as possible to answer questions from the representatives who came to consult. Outside the main venue, the SGX rented a separate meeting room, arranged several iron ore derivatives business trainings in two days, and brought makeup items from Singapore to make an "Iron Man" It issued a leaflet to solicit corporate representatives. As the first exchange to launch iron ore swaps, the SGX currently accounts for 90% of the global iron ore swaps. For traditional iron ore trading companies, buying low and selling high and earning the price difference is the only profit model. In a volatile market, this model is easy to operate; once the market goes down, profitability is extremely difficult. Iron ore financial derivatives provide a two-way mechanism for the market to do more shorts. Iron ore swap products first appeared in 2008, first launched by Deutsche Bank and Credit Suisse, and did not initially provide settlement services. In order to avoid the default risk of private bilateral swap transactions, the SGX launched an off-exchange (OTC) clearing service for iron ore swap contracts in April 2009. Since then, iron ore swap transactions can be arbitrarily chosen for the opponent to trade clearing. The iron ore swap contract is actually a derivative contract whose value is linked to the price of the spot market. Take the SGX iron ore swap business as an example. The exchange's iron ore swap contract is based on the 62% grade iron ore index price, which is 500 tons per lot and is settled in cash. This involves two prices, one is the “fixed price”, which is the agreed price of buying or selling; the other is the “floating price”, which is the reference price at the time of settlement. The reference price for the SGX iron ore swap settlement is calculated based on the monthly average of the TSI (The Steel Index) iron ore index price for the contract expiration month. The difference between the price of the buy and sell and the price of the TSI monthly average index is the gain or loss of both parties to the swap transaction. The essence of iron ore swaps is to sign a "gambling game" around the price of iron ore. Steel mills or traders can find a counterparty through this market to hedge their own price volatility risk of trading in the spot market. But for traders who are engaged in swap trading alone, this is a true gamble. It is not complicated to add iron ore swaps. Select a SGX OTC clearing member to set up a clearing account and submit certification documents such as registration certificate, latest financial statements, and board resolutions. The clearing member will conduct a credit check on the customer and process the application. Once the account is approved, the participant deposits sufficient margin to contact the broker for the transaction. Exchanges, economic companies and clearing members provide services by charging commissions. The SGX has a clearing fee of US$12 per lot. The fees of brokerage companies and clearing members require participants to negotiate with them. A trader involved in iron ore swap trading reveals that the market handling fee is at least US$0.1 per ton. According to the data provided by the SGX, as of July 31 this year, a total of 1,047 customers participated in iron ore swap transactions, 70% of which came from Asia, which doubled from two years ago. The number of brokerage companies involved has grown from less than 10 in 2009 to about 30 currently. The person who is the new favorite of a trader who imports 8 million tons of iron ore in a year told the Caijing reporter that iron ore swaps provide a means to cope with market changes. Since the beginning of 2010, the trader has participated in the SGX iron ore swap transaction. He said that it was difficult to hedge the spot trade completely in the past, and the market volume was limited. Tens of thousands of tons were very large at the time, but now they are selling hundreds of thousands of tons per day. The price of minerals began to decline at the end of last year, reminding him of the 2008 plunge – the price of the mine fell from a straight line of around $180 per ton to a minimum of $60 or $70. One of his fellow friends was holding 400,000 tons of ore at the time, with a net loss of more than 200 million yuan. "If there is this in 2008, many people will not lose so much," the trader said. After two years of practice, he believes that swaps will be helpful to the company's operations. "When the price of minerals falls, there is no way to do anything." A few months ago, the ore market price fell from $140 per ton to nearly $100. There is a huge disagreement about whether the market can rebound in the future. The trader also has no reason to support its judgment on market trends. Given the lack of spot inventory pressure, he sold 50,000 tons of swap contracts at around $90 per ton. As a result, when the price of the mine falls below $90, the swap transaction can be profitable. If the price of the mine rebounds, it will immediately replenish the spot and take the high position. Since then, the mine price has dropped to $89 per ton, and the 50,000-ton swap contract has been profitable. However, he did not immediately close the position, and the market immediately bottomed out, and the swap lost. He immediately bought 150,000 tons of spot stock in the spot market, of which 50,000 tons were hedged against swap contracts, and the remaining 100,000 tons were profitable in the later market. Because he was worried that the market would fall again in the short term, he did not close the swaps in one hand, but disposed of the 50,000 tons in batches. The above operation method is vice versa. When the market price falls, the profit of the swap can compensate for the spot trade loss caused by the market decline to some extent. Compared with the spot trading of iron ore, swaps eliminate the need for ordering, shipping, customs clearance, customs clearance, and sales. As a financial derivative, the risk of iron ore swap trading cannot be ignored. The above traders reminded that the use of iron ore swaps can not fully achieve hedging, there will still be a certain discount. More importantly, once the swap product is treated as a speculative product, the risk is significantly magnified. A trader who speculates on iron ore swaps told Caijing that he invested $100,000 in June and shrank to $60,000 in just a few weeks. The current market trend is difficult to grasp, the most insurance way is the two-way trading hedging risk. Although this has reduced the income to a certain extent, few people dare to unilaterally gamble, because this "can not operate, swap fluctuations are too frequent." Affected by fluctuations in the European and American markets on the evening of October 23, the iron ore swap of the SGX immediately fell by US$2/ton. However, the trend of rebar futures remained strong after the second volatility, and the iron ore swap response was too sensitive. Due to the many influencing factors, the regularity of iron ore swaps is not well mastered. "The swap changes are more frequent, and may go back and forth three times. The spot market has not moved. Of course, if you can guess every time you change, you can make money. But if you follow the European and American markets, the next day is already per ton. Losing 1 dollar.” The above traders revealed that what is really active in the swap market is speculators who operate both iron ore swaps and rebar futures. In the case of buying iron ore swaps and shorting rebar futures at the same time, once the rebar swaps, it will close the two markets. The rebar futures are more profitable than the lead iron ore swap market. Ore swap losses, resulting in arbitrage space. In addition to frequent fluctuations, the swap market is also susceptible to large market players. Compared with the spot market, the trading volume of the swap market is limited, and the amount of iron ore of 150,000 tons can have a greater impact on its trend. In the spot market, this number is only a common carry-on type of ore carrier, and the transaction is very common. Despite this, more and more traders are eager to try. At the China Iron Ore Spot Trading Platform General Meeting held in Dalian on September 26 this year, it was not uncommon to share traders involved in iron ore swaps, and many traders who had not participated in it showed great interest. Some large traders, especially state-owned companies, are cautious about this. As a major iron ore trader, traders such as Ruigang and Minmetals have always insisted on trading in the spot market with strong financial resources. Even if the market declines, big traders do not easily take a position to play, but insist on a rebound in the market. In terms of financial derivatives trading, central enterprises are subject to many regulatory restrictions and are difficult to trace in swap transactions. Asian steel mills and traders account for 13% of the iron ore swap trading customer composition provided by the SGX. Hanson, manager of TSI China, said that in the months when iron ore prices fluctuated significantly, the risk aversion of steel mills and traders rose, and the volume of iron ore swaps increased significantly. In the month when iron ore prices are stable, the willingness of traders to use the derivatives market to avoid the risk of the spot market is also reduced, and the trading volume of the swap market is relatively light. Han Xun pointed out that on October 22, the turnover of iron ore swaps on the SGX was only 220,000 tons. It is not difficult to see that the market is still waiting to see. Ore futures disputes The rapid development of the overseas iron ore derivatives market has attracted the attention of Chinese regulatory authorities. A year ago, the National Development and Reform Commission commissioned the Dashang Institute to start research on iron ore futures, focusing on the functional role and potential adverse effects of iron ore futures on the development of China's steel industry. The research team includes the National Securities Regulatory Commission, the Metallurgical Industry Planning and Research Institute, the Metallurgical Industry Economic Development Research Center, the Minmetals Chemicals Import and Export Chamber of Commerce, Shougang, Hegang, Anshan Iron and Steel, and Sinosteel. China's establishment of iron ore futures market is in good condition: China imports about half of the world's iron ore shipping trade each year. More than half of the 686 million tons of iron ore imported in 2011 were traded in the spot market. There are many steel companies and traders engaged in iron ore trading in China, which guarantees the activeness of future futures market transactions. A metallurgical industry expert involved in the research of the subject told the Caijing reporter that the steel industry authorities are inclined to launch iron ore futures as soon as possible to respond to the acceleration of ore financialization. The China Iron and Steel Association submitted the matter to the Standing Council, which was decided by the major steel mills. For iron ore futures, the industry is most concerned about contract standardization. Iron ore futures involve delivery, iron ore is affected by iron grade, sulfur, phosphorus, silicon, aluminum, moisture, particle size and other indicators, product prices vary widely. The subject matter of iron ore futures is domestic iron fines or imported minerals in the mainstream of the market. There are also differences. Han Xun pointed out that the actual annual trade volume of domestic fine powder is 200-300 million tons, which is limited to the market. The choice of mainstream imported minerals in the market involves issues such as delivery, settlement, and how overseas miners participate. The developers of the relevant varieties of Dashang explained that in the design of the quality indicators of the subject matter, the Dachs Institute will refer to the existing iron ore pricing system standards to make the specifications for the unit impurities. The design delivery warehouse is mainly in the Bohai Sea area, so it tends to use domestic fine powder as the target. However, the Grand Chamber of Commerce has also prepared alternatives for the reference of the regulatory authorities. In addition to the design of the subject matter, because the futures market has higher requirements on market liquidity, it is easy to breed speculation and bubble economy, which has higher requirements for the quality of market participants. Among the proportion of investors in foreign mature futures markets, the proportion of various types of enterprises participating in hedging and futures investment funds is relatively high, and individual investors are relatively small. According to the World Swaps and Derivatives Association (ISDA) study, 94.2% of the world's top 500 companies use derivative tools to manage and hedge risk. London International Financial Options Futures Exchange (LIFFE) commodity futures accounted for 95% of institutional investors, and almost 100% of options were institutional clients. The individual investors of the Chiba Exchange are less than 20%. In the HKEx, personal and overseas customers total 30%. In the Chinese futures market, more than 95% are individual investors, and mainly small and medium-sized retail investors. In 2011, the number of customers with a customer interest of less than 100,000 yuan accounted for a large proportion. China's futures market is still dominated by speculative trading, with a high turnover rate and a much larger volatility than the mature futures market. Therefore, whether the market price discovered by it can truly reflect the market supply and demand and is accepted by the steel industry still needs the market. verification. The above-mentioned big business people admit that even if the domestic iron ore futures are successfully launched, they will face the test of market acceptance. “Let Baosteel, Anshan Iron and Steel, Hegang, such large steel mills with certain voice in the spot market accept iron ore futures. It will take a while."

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