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China Challenges CME to SGX With Iron-Ore Futures Contract

China’s Dalian Commodity Exchange will start trading the country’s first iron-ore futures for physical delivery this week, challenging index-backed contracts by CME Group Inc. and Singapore Exchange Ltd. (SGX)

Trading will begin Oct. 18 after the securities regulator approved the plan last week, the bourse in the northeastern port city said in a statement on its website yesterday.

Chinese steelmakers, the world’s biggest iron-ore buyers, earlier this year questioned the reliability of a price index provided by Platts that became a benchmark after producers including Vale SA (VALE) and Rio Tinto (RIO) Group scrapped annual contract price talks in 2010. China started its own spot-trading platform last year, introducing a weighted average daily price in March.

“China aims to create the iron-ore benchmark, and in the commodities world, the way to do that is by having a futures contract set for physical delivery,” said Zeng Jiesheng, a Shanghai-based analyst with researcher Mysteel.com.

Futures already offered by SGX, CME and IntercontinentalExchange Inc. (ICE) are based on indexes and are settled financially rather than with the raw material.

The bourse will use stockpiles at ports including Tianjin, Lianyungang, Rizhao, Tangshan, Qingdao and Caofeidian, as well as material held at some steel mills, according to yesterday’s statement

Photographer: Adam Dean/Bloomberg

Traders work at the Dalian Commodity Exchange in Dalian. Close

Traders work at the Dalian Commodity Exchange in Dalian.

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Photographer: Adam Dean/Bloomberg

Traders work at the Dalian Commodity Exchange in Dalian.

The Dalian bourse, the nation’s third-largest futures exchange by volume, will provide an “objective and fair” pricing mechanism, it said in a separate statement.

Damon Leavell, a CME Group spokesman, declined to comment on the new contract.

Quick Takeoff

“Trading iron-ore futures may take off quickly because investors are already familiar with steel-related products, including rebar contracts on the Shanghai Futures Exchange,” said Wang Yongliang, an analyst at Beijing CIFCO Futures Co.

Imports by China rose to a record 74.6 million tons in September, according to data released on Oct. 12 by the customs agency. Chinese purchases account for about two-third of the seaborne trade, which is the biggest global commodity cargo after oil.

The contracts will be for 100 metric tons, have a daily trading band of 4 percent and be denominated in yuan, the bourse said.

Spot contracts for iron ore for delivery at Tianjin port traded at $133.10 a dry ton on Oct. 11, according to a price gauge compiled by The Steel Index Ltd. The spot contract has declined 8.1 percent this year.

To contact Bloomberg News staff for this story: Alfred Cang in Shanghai at acang@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net

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