China plans to launch an iron ore swap trading business and an iron ore physical trading platform, which suggests that China hopes to exert greater influence on iron ore pricing issues and protect itself from price volatility.
Comprehensive media reported on November 29 that iron ore prices fell 31% in October, forcing miners to change costly quarterly contracts, prompting pricing closer to spot prices. This wave of declines has caused iron ore prices to hit a 22-month low of $117 per tonne, which has also increased China's demand for hedging cost instruments. China is the world's largest buyer of iron ore.
Sources said earlier this month that the Bank of China's Investment Banking Department plans to launch iron ore swaps next year to meet the growing demand from steelmakers for cost hedging instruments.
About a week later, China's Beijing International Mining Rights Exchange (CBMX) said it plans to launch China's first iron ore physical trading platform in December.
GraemeTrain, commodities analyst at Macquarie Bank, said, “All these things can't change the supply and demand of iron ore. The supply and demand situation is the final factor determining the price. It may change the ability to hedge price fluctuations.â€
The above iron ore trading platform is not China's first attempt. In May 2009, some Chinese private traders launched the first unofficial iron ore trading platform, the Rizhao International Iron Ore Trading Center, to launch China's first iron ore index. However, the China Iron and Steel Industry Association quickly shut down the center, saying it would lead to speculation and disrupt the stability of the annual contract pricing mechanism for iron ore (which was then implemented).
Since then, global miners BHP Billiton, Rio Tinto and Brazil's Vale have taken the lead in pricing the mechanism to a quarterly price in order to take advantage of the rising spot price. Chinese miners eventually reluctantly accepted the move, which led to soaring costs.
The Beijing International Mining Rights Exchange will join Chinalco and China Everbright Group to jointly launch the new trading platform and open to domestic and foreign iron ore producers, traders and steel companies. But in order to stop speculation, banks and financial institutions must not participate.
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