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Dalian Commodity Exchange: Internationalization Of Iron Ore Futures Boosts Steady Development Of Industry Chain

In recent years, increasingly domestic enterprises in ferrous metals industry have been active in taking part in iron ore futures market. In particular, when the steel market encountered a round of plummet before and after the Spring Festival of 2018, and enterprises have made use of futures instruments to manage price risks and referred to the futures price as an instruction for their purchase pricing as well as their transformation and development. It is learnt that under the complicated and fluctuated market environment, domestic and overseas industry clients have encountered uncertain risks. After the introducing of overseas traders of iron ore futures, the futures price and hedging instrument that are involved and recognized by all global industry clients are expected to be formed. Some institutions said that iron ore futures will set up an effective platform for overseas industry enterprises and financial institutions to take part in Chinese financial market, and the platform will become an important channel of hedging against global industrial and financial risks and promoting the global iron ore trading.

Futures comes to help control market risks

After the 2018 Spring Festival, market expectation showed a decrease in the profit of forward per ton steel, a shrink in macro investment and an increase of uncertainty in the steel and raw materials market. Against this background, steel plants adjusted the ore blending proportion and overhaul arrangement on one hand to relieve the market imbalance between supply and demand and made lock-in of long-term cost and profit through the futures market on the other hand to maintain the stable income.

The forthcoming internationalization of iron ore futures will help to form the prices resulted from the trading of global participants and with more international representativeness and credibility. The annual iron ore trade volume of large trading companies in China reaches tens of millions of tons. With the internationalization of iron ore futures, domestic enterprises can adopt iron ore futures price of Dalian Commodity Exchange (DCE) as the benchmark price to engage in basis trading when negotiating with international mines and trading companies, which will further increase the market liquidity and enhance the enterprise’ hedging efficiency while finding the price, which allow global supply and marketing clients to benefit from the internationalization of the futures market.

Providing global enterprises with a hedging instrument

As China is the largest iron ore import and consumption country in the world, DCE’s iron ore futures price has affected the global ferrous metals industry chain. In recent years, remarkable changes have occurred in the iron ore supply and demand structure in the world, and domestic and foreign industry clients have encountered severe market risks. As a result, overseas mines, trading companies and other entity enterprises also need to hedge via futures instruments to enhance their risk management.

After the internationalization of iron ore futures, overseas mines and other corporate clients can directly take part in the commodity futures market in China, which will provide overseas enterprises with a new way of keeping value and hedging against international industrial risks apart from participating in the price formation.

To induce more over-the-counter financial service

At present, DCE’s iron ore futures price has attracted the attention of overseas investment banks and other financial institutions. While adopting iron ore futures price as a key reference for the industry development trend, financial institutions have actively schemed to provide entity enterprises with over-the-counter financial services by involving in DCE’s iron ore futures. As a result, international over-the-counter financial derivatives based on DCE’s iron ore futures will constantly spring up, thus offering stronger financial support for overseas enterprises.

Xu Xiaoqing, a chief economist of Dunhe Fund Management, believed that the shrinking of Chinese macro investment will further impact the global economy. Under such a circumstance, DCE’s iron ore futures will be an ideal instrument for overseas enterprises and financial institutions to hedge against the industry and macro uncertainty in the future.

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