China’s bid for greater influence over commodity prices is intensifying as record trade in its iron ore futures dwarfs its nearest rivals.
Derivatives volumes on the Dalian Commodity Exchange more than doubled to 18.6 million contracts last month, or 1.86 billion metric tons, bourse data show. Trading in contracts on the Singapore Exchange Ltd. totaled 78.2 million tons. UBS Group AG forecasts global demand at 2.04 billion tons in 2015.
The world’s biggest consumer of metals, energy and grains is seeking to tighten its grip over prices with its own contracts for raw materials from tin to coal. While bourses from London to New York maintain a hold on global commodity benchmarks, iron ore traders look to the Dalian market for direction, according to Clarkson Plc, a broker.
“With the high liquidity and the fact that it is in China, everyone looks at it as a lead indicator,” said Kelly Teoh, a Singapore-based iron ore derivatives broker at Clarkson. “The physical traders are watching it.”
Dalian’s iron ore futures started in 2013, challenging cash-settled contracts offered by Singapore Exchange, CME Group Inc. and Intercontinental Exchange Inc. Trade in Dalian is restricted to local citizens and companies registered in China.
Demand for the steel-making commodity is viewed as a barometer of growth in China, which UBS estimates buys 70 percent of seaborne ore. A global glut spurred by low-cost supplies and weakening demand from the Asian nation pushed iron ore to a 10-year low at the start of April. Prices went on to cap the biggest monthly gain in almost two years after BHP Billiton Ltd. said it was deferring some port works in Australia, the world’s biggest producer.
Price volatility is pushing more Chinese companies to the futures market to manage their risk, driving up trading volumes, according to Li Yaozhong, head of commodities at Beijing Lerui Asset Management Co.
“With prices falling and volatility increasing, more local steel mills and trading firms find it important to hedge price risk through the futures market,” Li said. “China has futures for thermal and metallurgical coal, iron ore, rebar and hot-rolled coil.”
The Shanghai Futures Exchange started trading nickel and tin in March, meaning it now offers the same main contracts as the London Metals Exchange, the world’s biggest metals bourse. About 2 million tons of nickel traded in the most active contract in Shanghai last month compared with about 2.2 million tons on the equivalent contract on the LME, according to exchange data.
Dalian’s iron ore futures have a large base of retail investors, while SGX contracts are mostly traded by industry players, said Ian Roper, a Singapore-based commodity strategist at CLSA Ltd. “Dalian definitely hasn’t changed Chinese buying power whatsoever,” he said by phone.
Open interest, or the number of outstanding contracts that haven’t been settled, was equivalent to 59.05 million tons in Dalian in April, less than half Singapore’s 129.5 million tons, exchange data show.
The commodity exchange in the northeastern city of Dalian started in 1993 with contracts for commodities including soybeans, corn and rice, according to its website. It now lists 16 futures products from eggs to plastics to coking coal. Trading volume was 770 million contracts last year.
Iron ore for September delivery closed 2.5 percent lower at 435 yuan a ton on the Dalian exchange Thursday after rising 2.8 percent on Wednesday. The daily benchmark from Metal Bulletin Ltd. for ore with 62 percent content delivered to Qingdao slipped 0.9 percent to $60.36 a dry ton on Thursday, after reaching the highest price since March 4 on Wednesday. It’s 69 percent below its 2011 record.