By Muyu Xu and Manolo Serapio Jr
DALIAN/MANILA, May 4 (Reuters) – China plans to open more of its futures contracts to foreign investors, a senior official said on Friday, as Beijing launched its “internationalised” iron ore contract as part of a bid to boost its sway over pricing of major commodity imports.
Iron ore is the second commodity China has opened to outside investors following the launching of a crude oil futures contract in March that aims to compete with rival global benchmarks.
The move is expected to increase trading in the Dalian Commodity Exchange’s iron ore contract, which was launched in 2013 and is already among China’s most liquid derivatives, with volumes far surpassing shipments of global seaborne iron ore trade.
The immediate impact may be muted, however, as Western trading houses such as Cargill and Trafigura have long had access to the contract through local Chinese entities. The change means foreign companies will be able to trade directly, opening the door to more market participants.
“We will accelerate the process to attract more foreign investors,” Fang Xinghai, vice chairman of the China Securities Regulatory Commission, told a packed crowd at the trading floor of the Dalian exchange.
“We will internationalise all the mature futures contracts and expand Chinese influence,” he said.
The most actively traded September iron ore contract was down 0.9 percent at 472.50 yuan ($74.47) a tonne by midday, retreating from a two-day spike that pushed the contract to a more than one-week high on Thursday.
Volume for the most-traded contract reached 2.18 million lots in the morning session. The average daily trading volume in April was 2.8 million lots.
The strong liquidity in China’s markets is a strength in its bid to be a price setter. Trading volumes in its crude oil futures have outpaced turnover on the rival Brent and the U.S. West Texas Intermediate contracts during Asian hours since its March 26 launch.
NEW PLAYERS
Unlike oil, gold and copper, for which prices are set in London and New York, iron ore is one of the few commodities whose global pricing takes its cue from China.
Prices there virtually dictate the path for the physical market. In 2017, Dalian iron ore volumes reached nearly 33 billion tonnes versus global annual iron ore trade of about 1.5 billion tonnes.
While global trading houses have been trading Dalian iron ore for some time, other prospective players may be wary given issues such as currency exchange, said Trafigura trader Micky Richmond at the Dalian event.
“Lots of U.S. hedge funds have showed interest in Dalian iron ore trade and the Chinese market … but I think it’s difficult for them, because of the margin situation and monetary situation, it’s hard to exchange between USD and CNY,” he said.
Bringing in top miners to trade on Dalian would boost China’s bid to be a global pricing centre, he added.
“I think it’s a positive move and will help boost liquidity and form transparent pricing for both suppliers and consumers,” Sergio Espeschit, head of top iron ore miner Vale in China, said at the Dalian event.
However, miners typically don’t hedge or fix prices for future sales because that means their earnings can be lower if prices increase.
“I think people still need more information on how it’s going to work,” said Wang Di from CRU consultancy in Beijing, adding that Friday’s price decline reflected a correction following a rally earlier this week.
($1 = 6.3452 Chinese yuan)
(Reporting by Manolo Serapio Jr. in Manila and Muyu Xu in Dalian; editing by Richard Pullin)
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