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China's iron ore to strengthen international pricing influence is imminent
Several of the world's biggest iron ore producers have used their monopoly positions to erode the "dividend" of China's steel industry, keeping the country's huge steel market on the back foot, especially during the property boom.
In late January 2014, the national development and reform commission said more Chinese companies should go abroad to invest in iron ore producers. This will enable the iron ore and steel prices to achieve a certain balance, forming a new model of upstream and downstream cooperation.
Although iron ore futures provide a favorable tool for maintaining the value of iron ore enterprises, overseas enterprises cannot directly participate in the domestic iron ore futures. The restriction of China's futures market system enables overseas enterprises to mainly participate in the overseas trading platform.
The general marketization of iron ore pricing began in 2010. Driven by strong international mines, platts index has gradually occupied the mainstream position in the pricing. At present, over 80% of the international iron ore trade is settled according to platts index.
"The limited sample collection of the platts index, the only time in a day that deals and offers are entered into the evaluation sample, and the process of price sample evaluation is not transparent, which makes the platts index very vulnerable to market manipulation." Market participants, particularly the steel companies, have called for a new fair and transparent iron ore pricing mechanism to be established as soon as possible.
It is clear that the world's established iron ore pricing centre has yet to take shape. Because of this, some overseas platforms have gone to great lengths to increase the influence of iron ore pricing. Take the Singapore market as an example. In 2014, the turnover of Singaporean swaps was 15 times that of 2010, and the quarterly average growth rate of iron ore futures and options was 63% and 32% respectively.
After the launch of iron ore futures in China, both domestic and foreign traders and domestic steel mills have been repatriated from the Singapore swap market due to the market's good liquidity, fair and reasonable delivery methods and better hedging efficiency, market participants said. Futures varieties at the same time, the benefit from a sound industrial chain system, the enterprise use futures mode constantly, such as from hedge directly to the virtual steel mills profit from across different market arbitrage and variety, and explore new models of silver period cooperation financial institutions in the premise of risk control, the iron ore spot of financing trade in hedging operations, realizing multi-win-win situation. Along with it, is the domestic iron ore futures prices now very high correlation, the main iron ore contracts since 2014 and the related market price correlation basic stay above 90%, the ore price has become the spot market and foreign trade important reference factor in derivatives trading, futures prices have platts index have a material impact.
Iron ore futures market for the development of the industry market euphoria, however, the securities and futures institute of Beijing industry and commerce university Hu Yu more said, while iron ore futures has played an important role in pricing power, but still in platts iron ore international trade pricing $index as the settlement basis, very bad for China's enterprises. These derivatives are based on the international iron ore price index, which is adapted to and coordinated with the spot trade index settlement system, thus consolidating the international settlement status of the dollar price index. If China does not press ahead, the impact of domestic iron ore futures on international market pricing will be extremely limited as the iron ore international pricing center will be left to another country.