China vows to open up more futures markets as iron ore goes international

By Muyu Xu and Manolo Serapio Jr

DALIAN/MANILA (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, 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 <0#DCIO:>, 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 as Western trading houses such as Cargill (CARG.UL) and Trafigura [TRAFG.UL] have long had access to the contract through local Chinese entities, but 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 DCIOcv1 closed down 1.2 percent at 471.50 yuan ($74) a tonne, retreating from a two-day spike that pushed it to a more than one-week high on Thursday.

Volume for the most-traded contract reached almost 2.9 million lots, just surpassing April's daily average of 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 (ISCc1) have outpaced turnover on the rival Brent (LCOc1) and the U.S. West Texas Intermediate (CLc1) contracts during Asian hours since its March 26 launch.

But the huge volumes also make China's iron ore contract a magnet for speculative retail investors, who have triggered wild price swings and prompted regulators to impose trading curbs over the past two years.

(Graphic: China's iron ore futures contract goes international - https://reut.rs/2JP3HUw)

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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.

"Finally the barrier is gone," Lee Kirk, managing director at Cargill Metals, said at the Dalian exchange event, although traders pointed to issues that could keep some Western players on the sidelines.

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Unlike other global benchmarks that trade on consecutive months, the liquidity in Chinese commodity futures tends to focus on a specific month, due to a different cost structure, which could favor Dalian rival Singapore Exchange, said Kirk.

Prospective players may also be wary of currency exchange, said Trafigura trader Micky Richmond.

"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 center, he added.

"I think it's a positive move and will help boost liquidity and form transparent pricing for both suppliers and consumers," said Sergio Espeschit, head of top iron ore miner Vale in China.

However, miners typically don't hedge or fix prices for future sales because that means their earnings can be lower if prices increase.

Japanese trading house Mitsubishi Corp (T:8058), which trades iron ore derivatives on the Singapore Exchange, is among those holding off on Dalian.

"I think the volatility may go smaller at the beginning when foreign spot traders test the waters. But it could go bigger again if they decide to stand by and more speculators come in," said Jin Yuandong who works at Mitsubishi's metals business.