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China DCE iron ore futures volume up 10.4% after internationalization

Singapore — China's Dalian Commodity Exchange iron ore futures were opened up Fridayto international companies, with volumes for the most liquid contract,September, rising 10.4% day on day to 2.86 million lots.

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The September contract last traded at Yuan 471.50/dry mt ($74.23/dmt),down Yuan 2.50 day on day, and settling at Yuan 469/dmt, down Yuan 8. Theoverall total open interest was up 27,000 lots at 1.8 million.

As the second commodity in China after crude oil to allow foreigninvestors to directly participate in its futures trading, the move reflectsChina's desire to have a greater say in commodities pricing.

China's iron ore imports were 1.075 billion mt in 2017, accounting formore than 60% of the world's total seaborne iron ore trade.

A DCE source said the exchange had spent three to five years on trying tobecome a global pricing center for iron ore contracts and that it would beactively pushing to internationalize its agricultural commodity products too.

Market participants welcomed the additional options and liquidity butothers were unclear about the exact impact it would have on the currentphysical market.

"Volatility will definitely rise with the influx of foreign traders, butit will also bring about added liquidity to the overall high supply of ironore cargoes on the market," a Chinese trader said.

"Using dollars or yuan for the deposit has helped some internationalplayers enter the Chinese iron ore future market immediately without botheringto register a Wholly Foreign-owned Enterprise in China. It is also nowpossible to net off the margins from arbitrage positions from both[Singapore's] SGX and the DCE in the same currencies, enhancing the leverageof funding," an international banker said.

There were steel producers who were cautious about the growing influenceof retail investors and speculators on iron ore pricing, but marketparticipants were generally adopting a wait-and-see approach.

"Accounts for foreign investors in many financial institutions are stillnot fully set up to enter the futures market so the trading volume may notrise as much as expected," an international trader said.

The nature and structure of DCE iron ore futures has also come undercloser scrutiny after the announcement of Shanghai Clearing House's plannedintroduction of iron ore swaps utilizing the 62% IODEX clearing in yuan.

"The Dalian iron ore futures seems geared towards speculators rather thanactual hedging purposes due to the lack of continuous months for trading," aneastern Chinese mill source said.

"The large incremental jumps in pricing (minimum tick size of Yuan0.5/dmt) compared with those from the Shanghai Clearing House (minimum ticksize of Yuan 0.01/dmt)and lack of liquidity in many months means that it willnot be an accurate reflection of the current physical market," aSingapore-based trader said.

Market participants also added that the exchange rate used by DCE wasanother doubtful point.

"We are quite used inquiring and choosing the best FX rates among theoffers daily. I am not sure if the published FX rate from DCE is competitiveenough and it could eat into profits," an international trader said. Sources also indicated the possibilities of arbitrage opportunities giventhat the Dalian iron ore futures specifications are fixed and would notreflect the recent rise in alumina penalties for iron ore fines.

The DCE, headquartered in Dalian, in northeast Liaoning province, wasestablished in 1993 and has launched futures contracts for agricultural andindustrial commodities with physical deliveries.

Liquidity on DCE's iron ore contract runs at a high multiple of physicaltraded volumes.

--Heng Jun Kai,

--Edited by Jonathan Dart,