The iron ore futures of Dalian Commodity Exchange (DCE), the world's first iron ore futures contract with physical delivery, has maintained a steady development trend in the one year since the listing, with the market liquidity improved continuously, the quality and efficiency of the market operation constantly enhanced, the futures market functions of price discovery and hedging gradually achieved, the profound impact found on the international iron ore pricing mechanism, and the role of the market in serving the industries and the real economy brought into play.
Rapid Growth and Sound Operation of Iron Ore Futures
Since the listing on October 18, 2013, the DCE iron ore futures has laid a solid foundation for the market to function and serve the industries, with the market liquidity continuously improved, the operation in a steady way and the influence constantly expanded. According to statistics, as of October 17, 2014, the total trading volume of the iron ore futures reached 67.6402 million contracts (unilaterally, the same below), with a turnover of RMB 4.7 trillion, a daily average trading volume of 276,100 contracts, a daily average open interest of 290,200 contracts and an equivalent of 6.764 billion tons of spot goods in trading volume. According to the spot trading volume, the iron ore has become DCE’s second-largest product next to the coke. On the comparable basis, the cumulative trading volume is about 23 times and 54 times of Singapore iron ore swaps and futures and 428 times of those of CME in the U.S. With the daily average open interest ratio to Singapore swaps market raised from 0.32 in 2013 to 1.26 in 2014, the domestic iron ore futures market has been deeper than the overseas derivatives markets of the same kind. With the expanding size, the market has run smoothly. Especially in 2014, the spot ore prices have been in decline, the enterprises are in urgent need of hedging, the trading volume and the open interest of the iron ore futures have been increased rapidly with the monthly average growth at 50.51% and 29.93% respectively, the highest intraday trading volume at 717,200 contracts and the highest open interest at 458,400 contracts, the futures prices have fluctuated in an orderly way in the movement of trend and the market has run soundly, showing a strong capacity for self-balancing. The continuously improved liquidity and the smooth operation of the iron ore futures market have laid a solid foundation for the functioning of market price discovery and hedging.
Diversified Investors Structure, Active Participation of Industrial Clients. According to statistics, so far the total number of the clients participating in the iron ore futures has reached 125,700 with the daily average turnover of corporate clients accounting for 39.60% of the total and the daily average open interest accounting for 30.63% of the total. The diversified structure of investors including mines, iron and steel enterprises, traders and other industrial clients as well as funds, private equities, futures asset management and other institutional investors has been formed. The overall high level of corporate clients’ participation demonstrates the significant market influence of the iron ore futures and the strong interests of the spot enterprises in participating in and making use of the market.
Since March 2014, with the exacerbated financing risks on the iron ore spot market resulting in sharp volatility of the market prices, the industrial clients have been much more active in participating in the futures market with the corporate clients accounting for 57.92% of the total at most, indicating that the influence and representativeness of the futures prices have been fully recognized by the market, and the motivations of the spot enterprises for hedging and the professional institutions for investment have been intensified.
Smooth physical delivery ensures connection of futures and sport markets. Whether the physical delivery can be successively implemented for the iron ore futures, the first adopting the physical delivery, will affect the achievement of the long-term goal of the iron ore futures market as a pricing market.
Since the first delivery for the I1403 Contract, the iron ore futures have attained 360,000 tons of delivery including 10,000 tons, 170,000 tons, 50,000 tons and 130,000 tons for the Contracts of 1403, 1405, 1406 and 1409 respectively; in terms of the delivery site and the category of the warehouse receipt, a total of 140,000 tons in warehouse delivery has been completed in Rizhao Port, Lianyungang Port and Tianjin Port with 220,000 tons in factory warehouse delivery achieved in Jiangsu Sha Steel (Lianyungang) and Sinosteel (Rizhao). In the delivery all the commodities are the mainstream ore products on the market with high quality with the market-concerned mixed ores and inferior ores not seen in the delivery. All the processes of the warehouse delivery and factory warehouse delivery were smooth and the participants such as the steel mills and the traders have experienced the transition from learning about the costs, getting familiar with the processes and attempting the delivery at the early stage to improving the hedging strategies and modes through scale delivery, further demonstrating the rationality and the market recognition of the design of the delivery system. Overall, the smooth delivery has made the physical delivery system successful in the market test, laying a solid foundation for the development and improvement of the iron ore futures in the future.
Iron ore futures market functions well with service for industries highlighted.
Market researchers pointed out that since the listing of the iron ore futures, the imbalance of supply and demand on the iron ore market, the industrial restructuring and the changes in the financial market conditions and other factors have resulted in significant fluctuations of the iron ore prices and especially the trend of rising iron ore prices for 10-plus years has come to an end this year. The future trend of the iron ore will undoubtedly become the focus of concern, and the market is also in urgent need of authoritative prices accurately reflecting the supply and demand as the reference for the production and operation. The rapid growth and sound operation of the iron ore futures market have increasingly brought its functions in price discovery and avoiding risks into full play.
Function of price discovery brought into play. Market participants believed that in recent years, the tight supply and demand for iron ore has caused the prices to run at high levels. Meanwhile, there are also the phenomena such as the overall market determined by the minor samples as a result of the opaque market and the information asymmetry and the indexes determined by ordinary biddings, and the supply and demand of the domestic spot market can hardly be reflected accurately.
In the iron ore futures market, with the open and transparent price formation mechanism, adequate attention and consultation of the market participants and full exploration and utilization of the information, the futures prices are open, transparent and predictive.
In terms of the effect of the price operation after the listing, with the constantly expanded market size and the continuously improved influence of the prices, the iron ore futures price has become one of the important reference prices influential on the market together with the Platts index, PB powder spot price, the CISA index and the SGX swaps. It is noteworthy that the futures prices have played some role in guiding the Platts index. The relevance between the iron ore prices and the Platts index is as high as 0.98, and the Platts index is released after the closing of the iron ore futures. Market analysts thus believe that in terms of time the futures prices will inevitably affect the formation of the Platts index and change the routine of the Platts index rising rapidly and falling slowly and recording more increases than decreases. The iron ore futures have begun to affect the pricing mode of the iron ore market. According to a recent market survey conducted by market institutions, among the 60 spot enterprises participating in the survey, 85% of the clients believe that the listing of the iron ore futures prompts the Platts index to objectively reflect the supply and demand of the domestic market.
Meanwhile, the correlation between the futures prices and the spot index prices at home and abroad is increasingly enhanced to stand above 0.97 at present, demonstrating the rationality and effectiveness of the futures prices. With the iron ore futures becoming increasingly brisk and the number of the participants gradually growing, the price difference between the spot price indexes at home and abroad and the iron ore futures shows the tendency toward stability. For example, at the early stage of listing, the indexes and the iron ore futures showed significant price differences, with the price difference between the SGX swaps and the iron ore futures recording the negatives. With the participation of the industrial clients and the quality of market operation continuously improved, the price difference between the iron ore futures and the related markets has been gradually narrowed.
In addition, the correlation of the iron ore and the coking coal, coke, rebar and other related products is increasingly enhanced, with the correlation indexes between the iron ore futures and the coking coal futures, the coke futures and the rebar futures on Shanghai Futures Exchange increased from 0.49, 0.15 and 0.29 respectively at the early stage of listing to more than 0.98 at present.
The iron ore futures prices and the spot index prices show basically the same trend of operation, indicating that the open and transparent futures market fluctuating around the spot market can soundly reflect the market supply and demand and provide more and more enterprises with reference for trading, and the prices have even affected the investment in international markets. According to a March report of "Australians", an Australian media, the DCE iron ore futures contracts have adequately shown the prediction for the price fluctuation of the spot market, and even become a wind vane for the stock prices of the mining enterprises on the securities market. On March 10 in particular, the DCE iron ore futures contracts took the lead to go down, followed by the decline of the Platts spot price, and the futures prices guided the international investors in selling the stocks of BHP Billiton, Rio Tinto and other companies to avoid investment losses.
