Dalian exchange urges Rio Tinto, BHP and Fortescue to trade in its futures market
The Dalian Commodities Exchange, the largest iron ore futures market, wants Rio, BHP and Fortescue to trade on its exchange.
The Dalian Commodity Exchange, the world’s largest iron ore futures market, is pitching for more Australians to trade on its exchange following its move to open up its iron ore contract to foreigners.
“We have opened up our iron ore futures to the world,” Wang Fenghai told The Australian in an interview in Dalian, a trading port city in northeast China which is a major importer of iron ore.
“Our biggest hope is that iron ore mining companies from Australia can participate in our market.”
Mr Wang said there one Australian company had signed up to trade on the exchange since it opened up to foreigners in May, out of a list of more than 80 foreign companies.
“As the opening up deepens, we believe that many more Australian companies and clients will open accounts to trade on our iron ore futures market.
“This is because the production of iron ore in Australia is huge. China imports a lot of iron ore from Australia.
“Iron ore from Australia accounts for 65 per cent of the iron ore imported into China.”
Mr Wang said the exchange could not reveal the name of the company which had signed up.
The exchange has had visits from BHP and Rio Tinto executives, but the major iron ore companies continue to trade directly with Chinese buyers.
Representatives from Brazilian iron ore giant Vale — the major rival for Australian companies selling ore to China — also visited the exchange earlier this month.
Foreigners registered to trade iron ore on the exchange include those from Singapore, Britain, the United Arab Emirates, Japan, Hong Kong and Taiwan.
Global commodity trading companies Glencore and Trafigura were among the first to sign up.
Australia sells around 700 million tonnes of iron ore to China a year, a business worth more than $40 billion, which is the single largest source of Australia’s export earnings. China is the world’s largest importer of iron ore, bringing more than 1 billion tonnes a year to feed its steel mills.
The Dalian exchange is the world’s largest iron ore futures market, with an annual trading volume of 320 million contracts or 33 billion tonnes, making up 96 cent of the total global iron ore futures trading. The only other exchange which trades iron ore futures is in Singapore.
The iron ore trading contract on the Dalian exchange was launched five years ago.
Mr Wang said he hoped that the big Australian miners such as BHP, Rio and Fortescue Metals would eventually choose to trade on the Dalian exchange as a way of hedging some of their risks.
“My message to the iron ore companies of Australia is that participation is better earlier than later,” he said.
The exchange’s goal is for its futures prices to become a global benchmark for iron ore trading.
At the moment buyers and sellers in the iron ore market use a variety of indexes to price trading, with an index produced by Platts, based on 62 per cent iron content, dominating the market. But rival index companies are pushing the merits of their pricing, as buyers and sellers on both sides look for what they see more accurately reflects the real market price.
“We want the iron ore futures market to become a pricing benchmark,” Mr Wang said.
“The price formed in the futures market is open, transparent and continuous and reflects the free judgments of people and market participants from around the globe.”
The Dalian exchange has more than 18,000 companies registered to trade contracts including more than 1200 steel mills, traders and industrial clients.
Others include hedge funds, speculators, institutional investors and fund managers.
The exchange estimates that there are more than 400 million tonnes in the global iron ore market which is not subject to long- term contracts.
Opening up the iron ore futures market to foreign players is a move by the exchange to deepen its market and increase its importance in the overall global iron ore market.
“More and more steel factories and iron ore merchants are using our iron ore futures as a reference for arranging their commodity (deals),” Mr Wang said.
US trading giant Cargill recently did a deal with China’s Hebei Iron and Steel using the futures for its pricing benchmark.
Mr Wang said the Dalian exchange, which trades a variety of products including coking coal, egg, grains, oils, chemicals and soybeans, had recently opened up its first overseas office in Singapore as part of its push to attract more international clients.
He said it would soon be opening up an office in Hong Kong.
Mr Wang said he believed that iron ore would follow the trend of other major world commodities such as oil with the futures market determining their benchmark trading price.
“The trend in commodities is to move from the traditional pricing arrived at by direct negotiations between buyers and sellers to a cash price index and then to a pricing system based on the futures market,” he said.
“Whether Australian iron ore companies will eventually participate in our market and use our price will depend on whether our market is operating well.
“We are confident that those iron ore companies will eventually use our market because the biggest buyers in the cash market are in China.”
Mr Wang said the Dalian exchange was the only iron ore futures exchange in the world that allowed physical delivery of iron ore to settle contracts. This meant participants in the market could use it to actually buy iron ore as well as for price hedging.
So far just over 5 million tonnes of iron ore has been physically delivered since the Dalian exchange started trading iron ore contracts in 2013.
Mr Wang said the futures market had been “operating very smoothly” since it was launched, but he would like to see more institutional investors in its market.
“We don’t have a lot of institutions participating in our market. It is one of our weaknesses.
“We are putting a lot more effort into attracting institutional investors. We want to have a lot more mutual funds participating.
“The future healthy development of our futures market requires two components — one is the participation from overseas industrial and commercial users and the other is institutional participation from investment companies in China and overseas.
“The iron ore trade from Australia accounts for more than 80 per cent of the global seaborne trade in iron ore. One of our biggest hopes is that we can provide a very convenient way and more channels for Australian iron ore mines to sell their product.”