www.unuudur.com » China eyes bigger role in iron ore pricing and hedging

China eyes bigger role in iron ore pricing and hedging

[Нийтэлсэн: 19:59 02.12.2011 ]


China plans to launch an iron ore swaps business and a physical iron ore trading platform are a clear sign of its desire to take on a bigger role in pricing its biggest import commodity and protect itself against increasing volatility. A 31% slump in prices of the steelmaking raw material in October forced miners to alter costly quarterly contracts and spurred a move toward pricing that is closer to spot rates. The drop which brought prices to a 22 month low at below USD 117 a ton also raised the need for tools that will help China, the world’s No. 1 iron ore buyer, hedge cost.Sources told Reuters earlier this month that the investment banking arm of the Bank of China, one of the country top four lenders is planning to open an iron ore swaps business next year to tap growing demand for hedging from steel mills.

About a week later, the China Beijing International Mining Exchange said it plans to launch the country’s first physical iron ore trading platform at the end of December.

Mr Graeme Train commodity analyst at Macquarie Bank said “Ultimately all of these things don’t alter the demand-supply balance for iron ore which is ultimately what moves the price. What it might change is the ability to hedge prices.”

The planned iron ore trading platform will not be China first attempt. In May 2009 a few big private traders in China set up the country first non-official iron ore trading platform, named Rizhao International Iron Ore Trade Center with the aim of publishing the country’s first iron ore index.

But the China Iron and Steel Association soon shut the centre down, saying it would introduce speculation and destabilize the pricing mechanism, which, at that time, set iron ore contracts annually.

The industry has since moved to quarterly pricing, spearheaded by global miners BHP Billiton, Rio Tinto and Vale eager to cash in on rising spot prices. It has been grudgingly accepted by Chinese mills, whose costs have consequently soared.

The new platform which CBMX will set up jointly with Aluminium Corp of China and China Everbright Group, would be open to international and domestic iron ore producers, traders and steel firms. But in a bid to deter speculation, banks and financial organizations would not be allowed to participate.

China has long distrusted the mechanism at which iron ore, its biggest commodity import by volume, is priced.

With supply contracts based on reference price indexes published by non-Chinese companies, Beijing has complained that the indexes are prone to manipulation.

Many Chinese steel producers have stayed away from the market because of these manipulation fears, and also because they lack the knowledge and skill to trade in swaps.

Mr Xun China manager with the Steel Index said “Chinese steel mills are concerned about speculation and manipulation by foreign investment banks and top miners, while they feel they are newbies and are more vulnerable to risks.”

He said that “Domestic banks, especially state-owned ones, are more trustworthy for steel mills who will be encouraged to learn and use more of the hedging tool amid a more volatile market.”

Big firms such as China COSCO Holdings, CITIC Pacific Ltd and airline companies have made massive losses from derivatives bets over the past few years, forcing the government to toughen its rules.


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