CHINA: DCE Publishes Notice on Soliciting Public Opinions on Adjustment of Iron Ore Futures Contract

Wednesday May 12 2021

On 12^th May 2021, the Dalian Commodity Exchange (DCE) published a notice on soliciting public opinions on the adjustment of iron ore futures contract and relevant rules. The adjustment of related rules and business will be implemented on the new contracts. Market participants believe the plan released this time will reduce the Fe content requirement of standard product, reflect the features of further expanding resources available for delivery and better meet industrial demand. This also keeps in line with new market trend. As stated in the plan, the rolling delivery will be implemented on iron ore futures, which will make it easier for enterprises to participate in delivery and promote the smooth development of iron ore futures trading and delivery.

Reduce Fe content requirement of standard product, optimize quality and brand premiums/discounts

Since September 2019, DCE has implemented a delivery mechanism commencing with the I2009 contract month. Nine imported ore brands and two domestic ore brands were set as deliverable brands according to relevant quality standard. Brand premiums and discounts were introduced on the basis of quality premiums and discounts so as to better meet the steel mills’ demand of production material and make futures price more representative for spot market. DCE has added six deliverable brands according to market conditions and industrial demands since last year. Currently, there are 17 brands available for delivery, and every year approximately 620 million MT domestically-used iron ores can meet the delivery requirements, which effectively expanded the resources available for delivery.

Iron ores are resource-dependent products with poor standardization. For the past few years, under the impact of COVID-19 at home and abroad, changes in spot supply and demand, and monetary policy, etc., the relationship between supply and demand of spots for various brands showed considerable differences, and the spread between different brands was also in frequent and large fluctuation. For example, since early 2019, the minimum Carajas-PB spread and SSF-PB spread were 40 CNY/MT and -62 CNY/MT. The maximum Carajas-PB spread and SSF-PB spread were 249 CNY/MT and -410 CNY/MT, accounting for nearly half of iron ore’s prices, respectively.

However, the stability requirement of futures contract underlying and the relatively fixed brand premiums/discounts result in the inconsistency between the dynamic spot brand spreads with the relatively fixed futures premiums and discounts. Some brand and quality premiums/discounts may be inconsistent with the spot market fluctuation. On such basis, by working with industrial organizations, DCE conducted further research on iron ore contract, rules, premiums and discounts, and then formulated the amendment plan referred to herein.

According to the plan, the reduction of Fe content of futures standard product is highlighted in the adjustment of contract and related rules, decreasing from 62% to 61%. Meanwhile, the quality premiums and discounts are still principal and optimized together with brand premiums and discounts on the premise of limited deliverable brands. After adjustment, the spreads between different brands will be mainly reflected in quality premiums and discounts. The brand premiums and discounts that are weakened but properly configured will facilitate the delivery of brands with large spot trading volume.

The market experts also say that the Fe content of ores in spot market has declined in recent years as mines continue to be exploited. By measurement, the mean Fe content of mainstream medium-grade iron ores is 61.4%. DCE will reduce the Fe content of standard product from 62% to61%, which is in line with the current Fe content of mainstream iron ores in market and actual demands of domestic steel mills.

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