As an important part of the design of the futures contract system, the quality standards of the delivered products are one of the critical factors for the successful operation of the futures. When soliciting opinions on the iron ore contract rule, an official of Dalian Commodity Exchange (DCE) said in an interview that this time, under the principle of serving the iron and steel enterprises, reflecting the quality of the mainstream ores in the market, making the indicator system simple and clear, taking the future trends of the industrial development into account and supporting the implementation of the national industrial policies, DCE has set the benchmark delivered products and the quality standards of the iron ore futures, with reference to the prevailing spot trading standards. In line with the trading features of China’s major imported iron powders and considering the economic benefits of domestic mines and the balance of the supply of domestic and foreign ores, the design will help to ensure the smooth operation after the listing of the iron ore futures.
According to the draft of the iron ore futures contracts, in order to strengthen the directing characteristic of the futures quotation prices and on the basis of the reality of the iron ore spot trade, DCE has set the iron ore fines of 62% grade as the benchmark delivery product of the iron ore futures with the fine ores and concentrates above the grade 60% as alternative delivery products, the five indicators of iron grade, silica, alumina, sulfur and phosphorus contents as the main indicators of premiums and discounts and the trace elements as "restrictive" indicators.
According to the official, with the single purpose, 98% of the iron ore is used as the raw material for iron and steel production; about 1.6 tons of iron ore is needed to produce 1 ton of pig iron; the iron ore accounts for 50% - 60% of the cost of pig iron. China is the "superpower" of iron ore consumption in the world, accounting for 59% of the total; in 2012, China produced 654 million tons of pig iron, equivalent to the consumption of 1.05 billion tons of refined ore, hence the substantial impact of the iron ore price volatility on the operation and development of the whole industry, which requires to design a scientific and reasonable quality standards system of iron ore delivery products on the basis of the reality of the spot market of iron ore so as to better facilitate the hedging of the enterprises by including more possible spots in the delivery system while prioritizing the grades of the mainstream spots.
According to the sources, after selecting and mining, the iron ore is processed into different physical forms of trade. The iron ore trade in the world mainly includes raw ore, lump ore, ore fines, concentrate and pellets, etc. after being broken, the high-degrade iron ore with the particle sizes from 1 mm to 10 mm, which is called “ore fines” (or raw fines), can be used as the raw material for sinter; the iron ore below the degrade of 40% can only be used after being improved to higher degrades by fine grinding and ore beneficiation, which is also called “concentrates” (or fine powder). Concentrates and ore fines are both the raw materials for producing "processed ore" (sinter and pellets). In the designing of the iron ore futures, the selection of the ore types is the basis for setting the delivery quality standards, and DCE has set the ore fines and concentrates as the first delivery products of the iron ore futures.
According to the official, the ore fines and concentrates are set as the contract delivery products mainly on the basis of the following factors:
First, the ore fines and concentrates are China's mainstream products in production, consumption and trade. In 2012, in China's production of 440 million tons of refined iron ore, 420 million tons was concentrates, accounting for up to 95 percent, and in the imports of 740 million tons of iron ore, the ore fines amounted to 560 million tons, with the ore fines and concentrates accounting for 83% of the total supply of iron ore in China.
Second, the ore fines are the product with the biggest exposure risk for China's enterprises. The ore fines are in the majority in the imported iron ore, and the risks of prices and inventory of imported iron ore are mainly from the following two aspects. The first aspect is the long-distance shipping, as the shipping of the mainstream imports of iron ore from the sources to China takes half a month or even as long as 40 days. The second aspect is the huge inventory, as the average stocks of iron ore at China’s ports increased from 44.6 million tons in 2007 to 94 million tons in 2012, and even calculated according to the relatively low price volatility in 2011, the monthly depreciation risk of the iron ore stocks at China’s ports stands at more than RMB3 billion.
Third, the price of ore fines is more representative. Under the current global iron ore index pricing system, the index institutions collect and publish the CIF price of imported ore fines at the ports of North China; the derivatives related to iron ore in international markets are designed with the ore fines as the benchmark.
Fourth, the ore fines and concentrates are future clear trade flows and simple setting of delivery locations. The domestic concentrates are mostly found in the Bohai Sea Rim and consumed in the region; the Bohai Sea Rim is also the main region for ore fines imports with the ports such as Qingdao, Rizhao, Tianjin and Lianyungang in the region having become the distribution center and the logistics hub for the trade of ore fines.
Fifth, the indicators system is simple with low dependency on quality. In comparison with sinter, pellets and lump ore in the forms of furnace burden, both concentrates and ore fines are featured simple quality evaluation systems, and besides, both need to be mixed to produce sinter or pellets. Therefore, the steel mills are less dependent on the quality of single kind of ore fines or concentrates.
As the most important indicator for measuring the value and quality of the ores, the grade of iron ore is the very core factor in designing. The DCE official said that after in-depth research and discussions of multiple parties, DCE set the iron grade of the benchmark product of the iron ore futures at 62%. Considering both the reality of the spot market and the characteristics of the financial derivatives, it is decided that the ore fines and concentrates above the grade of 60% can be delivered, among which, for 60% ≤ grade < 62%, a discount of RMB 1.5 / ton is for a decrease of 0.1% in grade; for 62% < grade ≤ 65%, a premium of RMB 1.0 / ton is for an increase of 0.1% in grade; for grade > 65%, the price is set at the grade of 65%.
Such a design first reflects the principle of serving the steel enterprises’ risk-avoiding. At present, all iron ore indexes both at home and abroad and the relevant derivatives standard of international iron ore are all with the benchmark of 62%-grade ore fines, which has made the 62%-grade ore fines as the price wind vane of the iron ore spot market, and locating the 62%-grade can promote enterprises’ hedging effect and give full play to futures’ risk-control function. Second, the 62%-grade ore fines represent the mainstream quality of iron ore supply and meanwhile, the 62%-grade agrees most with the distribution characteristics of import ore grades. Third, the simple and clear index system of the 62%-grade adapts to the buyer’s demands, which can help to stabilize steel mills’ expectation and promote steel enterprises to actively participate in the futures market. Fourth, such design has taken account of the development trend of the industry and matched the implementation of the national industrial policy. In 2010, the productivity of blast furnace above 2,000 m3 accounted for 39% of the total blast furnace productivity, showing that the large-scale blast furnace is the trend in the future. The large-scale blast furnace applies the strategy of “beneficiated burden material” and its main mineral material is the high-grade iron ore. Relevant industry associations and government departments in charge will make enhancing iron ore’s economical efficiency as one of the major works during the “12th Five-year Plan”. Therefore, locating the iron grade of the futures standard delivery products as the 62%-grade and encouraging the high-quality ores to participate in the delivery have taken account of the industry’s future development and also displayed the futures market’s function of standardizing and unifying, thus matching the implementation of the national industrial policy.
The person in charge said that as China is the world’s largest iron ore consumer and importer and the third largest iron ore producer, maintaining the stability of the iron ore market is of great importance to the healthy development of the steel industry and the national economy. In recent years, great changes have been taken place in the structure of iron ore market and after the collapse of the annual negotiation pricing mechanism, frequent fluctuation has been seen in the market price, leading to enterprises’ strong demand for risk-avoiding. As early as in 2007, DCE has listed the iron ore futures as the reserve variety and has strengthened the efforts on research and development since 2009. After in-depth research and wide demonstration, we believe that the iron ore market enjoys a large market scale and active spot trading and has a high level of marketization and numerous market participants with risk-avoiding demand. Besides, its stable quality and smooth logistics are easy for organizing delivery, and the high market recognition of the trade index system and the scientific and practicable index detection method that can be standardized have made it possible to launch iron ore futures in delivery settlement method. Having solicited opinions from all parties, DCE has completed the design of the draft of the iron ore futures contract. And in the previous research and survey, business representatives believed that the major indexes have been scientifically and reasonably set and have high integrating degree with the spot market, thus able to meet the spot enterprises’ risk-avoiding demand. DCE is now soliciting public opinions from the market on contract rules and wishing that all parties can actively participate in the opinion solicitation, so as to come up with new and better ways to improve the iron ore futures contract rules.
Market researchers believed that the current design of the quality index system of the iron ore futures delivery products has included the mainstream ores in the delivery system. With its representative price, wide range of deliverable products, and controllable delivery risks, the iron ore futures has been widely recognized by the enterprises. Judging from the present feedback information, many steel enterprises believed that the current clear standard system can meet the enterprises’ demand and can help them easily grasp the market. After the launching of iron ore futures, enterprises, on the one hand, can grasp the future trend and timely adjust the production, management, and purchase plan with high efficiency through the futures market’s price-finding function; and on the other hand, they can better avoid the risks of the upstream raw materials and further promote their stable operation through hedging in the futures market.