Dalian Commodity Exchange 英文 : Changing the Iron Ore Trade Game.
Iron ore futures for physical delivery debuted on the Dalian Commodity Exchange on Oct 18th 2013.
DCE are the first contracts with physical delivery in the world, and it is hoped that the physical delivery will make the pricing of the iron ore, an international bulk commodity, more reflect the actual supply and demand as well as the process of forming the commodity prices, so as to improve the openness and transparency of the trade of the commodity. The trading volume of the iron ore futures has reached 260,000 lots, an equivalent of 26 million tons of iron ore on the basis of 100 tons / lot,” said Qian Jin, “The volume equals the amount of iron ore transported to Chinese ports in several days.
- According to JP Morgan Commodities:
- There is no apparent seasonality in iron ore. They we have looked at seasonal trends in China steel production, iron ore imports, steel inventories, and port stocks. With the exception of China steel production, which typically peaks in the summer months, there is little evidence of any seasonality in the other data series.
- A Trend in High Stocks is supportive for Iron Ore Prices.
- Current Inventory are now estimated at 90Mt, reached a low of 75Mt peaked at 100Mt in 2012.
With the DCE Market Structure, inventory could jump above the 100Mt mark in 2014.
- The market Structure shows a Contango between spot prices based on Iron Ore Swap and the newly introduced DCE Futures.
- This spread is about 25$/Mt.
- This arbitrage covers 2.5 times the Capesize Freight Rates+Fuel costs.
- From a Trading/Chartering perspective, a Long the Carry Arb is possible with the DCE Exchange for Physicals Delivery.
- In this trade Traders:
- 1. Buy Cash Ore, sell the Nov Swap.
- 2. Chartered a Cape and hedge freight with a long Cape MCH 4TC.
- 3. Buy the Nov/Mch Swap spread
- 4. Sell the DCE Mch Futures.
- Finally, the trader sell the Cape Mch 4TC, buy the MCH Swap and complete Cash ore delivery to China.
- DCE pricing system
DCE is likely to provide a greater price transparency, more liquidity, less prices rigidity. If it’s successful, the new pricing mechanism is a game changer, the global iron market might become a total new animal.
With the EFP feature, China now makes possible competitive Iron Ore deliveries at its ports by anybody including national and international miners.
Nothing prevent Big 4 miners and foreigners to participate in the DCE pricing system, it’s up to them to use the DCE Iron Ore Futures with the EFP delivery option offered.
The current market structure is supportive for a Long Carry Trade and as long as this structure prevails, this physical arbitrage will support freight Demand.
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