China's Dalian Commodity Exchange (DCE) has got approval from Beijing to open iron ore futures trading to foreign capital, making it the second commodities futures contract priced in Yuan -- after oil -- to be open to foreign investors.
China Securities Regulatory Commission (CSRC) said iron ore is a designated commodity to allow overseas investors to trade. The CSRC spokesman also said preparations for this initiative are underway, although no timeframe was given.
Due to the lack of international participants, DCE futures pricing currently has limited influence outside China, sources said.
The decision by CSRC would better allow for both Chinese and foreign capital to trade on the same DCE platform which would make DCE futures prices more open, a DCE executive was quoted as saying in a local news report.
Futures trading on the DCE will remain and be priced and settled in Chinese yuan. The key change is that participants are allowed to make deposits in US dollars.
A source at an international trading house said the initiative was a "good step forward" in helping attract more investment for futures trading on DCE.
But there are still outstanding problems preventing it being an efficient tool for hedging, the source added. In particular, DCE futures contract have their penalties and premia for all impurities fixed for three years, and the next futures contact will be launched only by September 2018.
In contrast, the iron ore market had dynamic changes in silica and alumina penalties in 2017.
The 1%-per silica differential spread, assessed daily by Platts, hit $3.20/dmt on December 29, 2017, up $1.70 or 113% from $1.50/dmt on the first trading day of last year on January 2 between band of 4.5%-6.5% for iron ore fines with grades between 60-63.5% Fe content.
The silica differential shot up last year to $3.90/dmt on September 25, according to S&P Global Platts data.
In contrast, the DCE standard contract is 62% Fe standard, with silica less than 4% and alumina less than 2.5%. A Yuan 1/dmt penalty will be imposed for every 0.1% exceeding the 4% silica level.
"DCE is a however good tool if you want anything for proprietary trading. There is more liquidity there. It is good for speculation," the source said.
Another international source which has started trading on DCE said it had established a local setup in China to participate in DCE futures trading a few years ago and this initiative would only be attractive to companies that have yet to establish their trading entity in China.
"Nothing much is heard yet, everyone is waiting for new follow-up from DCE," said the International trader.
DCE in an emailed statement to Platts said the timeframe for foreign investors to participate in DCE iron ore futures contracts had yet to be announced, with further details to be decided following market consultations.
The DCE, headquartered in Dalian, in northeast Liaoning province, was established in 1993 and has launched futures contracts for agricultural and industrial commodities with physical deliveries.
China's actual volume of iron ore imports reached 1.075 billion mt in 2017, accounting for more than 60% of the world's total seaborne iron ore trade.
