Dalian Commodity Exchange (DCE) held the Iron Ore Basis Trading Forum in Shanghai lately. A total of 65 representatives from 24 institutions, including mines, trading companies, steel mills and futures companies both at home and abroad, communicated thoroughly on the basis trading of iron ore.
An official of the DCE International Cooperation Department introduced the internationalization and basis trading of iron ore futures. Overseas clients had paid more attention to and further involved in iron ore futures since it ushered in overseas traders in May 2018. Up till now, 122 overseas clients from various countries and regions including Hong Kong, Singapore, the UK, Australia and Japan have opened accounts. In March 2019, the average daily trading volume and open interest of overseas clients went up by 225% and 197% respectively, compared with those in May 2015. The market structure of iron ore futures has been further optimized. In the first quarter of 2019, the open interest of corporate clients accounted for 47.5%, up by 10% compared with the same period of last year.
While domestic and overseas industry enterprises have involved in the futures market, the basis trading with futures price as its benchmark has been promoted in iron ore trading. In 2018, the iron ore basis trading amount of iron and steel enterprises in China exceeded 10 million tonnes, and the 2 million tonnes agreement on iron ore basis trading signed by the international trading company Cargill and Hebei Iron & Steel (HBIS) Group has shown a model effect on promoting the basis trading in the industry. To attract the participation of international mines, trading companies and other overseas enterprises, DCE has organized the iron ore basis trading forum for overseas enterprises in Dalian, Shanghai and other cities successively to encourage overseas enterprises to conduct risk management and pricing with futures.
The guests shared the fundamental principles, application strategies and practical cases of basis trading at the forum. “Basis trading generally includes the buyer’s spot pricing and the seller’s spot pricing. In the buyer’s spot pricing, the buyer will make spot pricing at the appropriate time in the contract period to lock up the purchase cost, and the seller will avoid price fluctuation risks by hedging in the futures market. In the seller’s spot pricing, the seller will set the appropriate selling price by exercising its spot pricing right, and the buyer will lock up the purchase cost by hedging in the futures market.” Yang Lei, Chief of the Iron and Steel Industry Department of Guosen Futures, said that the buyer’s spot pricing is more popular, and the iron ore trading between HBIS Group and Cargill has adopted this mode and achieved a win-win result.
For steel mills, basis trading is more close to the practice of spot trading compared with the traditional floor hedging, and they will suffer less pressure from the internal compliance and audit of companies, thus bringing convenience for their understanding and operation. “We’ve transferred the price fluctuation risk to the futures market through basis trading, which has reduced the purchase costs as a result.” said Li Meng, Deputy Chief of the International Futures Department of HBIS Group.
Shen Haiping, Chief of the Iron Ore Spot Trading of Cargill, believed that both sides of the trading can designate the delivery site and time according to their demands, and decide upon the delivery way (spot goods at ports or afloat goods) through negotiation, thus greatly enhancing the flexibility of spot trading. Currently, great fluctuations have been seen in the iron ore price, and the market situation has been increasingly complex. Basis trading would help enterprises to optimize the storage structure, stabilize trading channels and hedge against market risks.
It is learnt from the forum that the spot pricing side should notice the timing and techniques of spot pricing in practical business. For example, the spot pricing side can make spot pricing for several times to avoid missing the best spot pricing time. The futures and spot prices will be closer as approaching the delivery month, and spot pricing at this time is an effective way to lower the risks. Besides, the two sides should control business risks. “As a trading company, Cargill would prefer large enterprises when choosing a partner for basis trading, so as to avoid possible default risks of the buyer caused by sharp basis fluctuations.” said Shen Haiping.
A representative from a relevant overseas institution pointed out that they had a deeper understanding on the principles, risk management and application of the basis trading through this forum. They would actively take part in the training organized by DCE to learn about the actual operative techniques, profit models, risk prevention and control of basis trading; carry out basis trading upon study, thus driving the Chinese futures markets to play a more important role in optimizing the iron ore pricing mechanism and serving the iron ore trading.
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