Industry experts unable to agree on iron ore futures
Shanghai. April 1. INTERFAX-CHINA - After the Indian Commodity Exchange (ICEX) launched the world's first iron ore futures contracts on Jan. 29, the debate as to whether China should make the move remains unresolved.
The main argument for iron ore futures is that they would help reduce price volatility, according to Xu Xu, chairman of the China Chamber of Commerce of Metals, Minerals, and Chemical Importers and Exporters (CCCMC).
In April 2010, global iron ore giants Vale, Rio Tinto and BHP Billiton scrapped the annual iron ore pricing system which had been in place for over 40 years and adopted a quarterly mechanism based on The Steel Index (TSI), the Metal Bulletin Iron Ore Index (MBIOI) and the Platts Iron ore spot market assessment (IODEX).
"Iron ore prices face increased volatility as a result of the new system. Launching iron ore futures could help hedge against these risks," Xu said at a recent conference in Kunming City, Yunnan Province.
Xu added that the three indices used in the current system are derived from China's spot prices. This data does not take steel mills into account, and is only collected from iron ore traders who have an interest in giving inflated spot prices. As such, Xu believes China should consider creating its own index.
Xu also noted that, as the number of steel mills involved in futures trading continues to grow worldwide, both futures and spot prices will become increasingly interlinked, helping mills to set a benchmark spot price.
Umetal analyst Hu Kai, however, holds reservations about iron ore futures. Hu feels that price volatility will push iron ore futures prices above spot prices, spelling losses for China's mills. Their bargaining power in pricing negotiations will deteriorate further as more iron ore miners opt to sell through futures contracts. Moreover, financial organizations that hold large stakes in major iron ore multinationals are likely to exercise a disproportionate degree of control over the futures market, Hu added.
But while state-owned steel mills are currently prohibited from participating in iron ore derivatives trading, some private mills, such as Jiangsu Shagang Group Co. Ltd., are already getting involved. Furthermore, the Singapore Mercantile Exchange is due to launch an iron ore futures exchange in May, Reuters reported March 21.
And despite Hu's reservations, he sees the launch of iron ore futures in China as inevitable. "Global iron ore miners predict domestic output will soon outstrip demand, and iron ore futures would help them to maintain their pricing power," said Hu.
Meanwhile, Liu Yinan, vice chairman of the CCCMC, told Interfax that iron ore futures trading in China will be a two-sided coin. "On the one hand, contract prices will better reflect market fundamentals," said Liu. "But the country's demand for the raw materials will remain strong, and the introduction of futures will greatly reduce China's pricing power."
-XH