On July 23, 2014, Rizhao Steel Holding Group and Yongan Futures and CITIC Huanqiu Trading (Shanghai) Co., Ltd. signed China's first iron ore basis trading contract in Rizhao, marking a substantive step forward in giving play to the role of the futures in pricing the iron ore.
This time Rizhao Steel Holding Group signed a contract of 5,000 tons of iron ore with CITIC Huanqiu Trading and a contract of 10,000 tons of iron ore with Yongan Futures with the i1409 Contract as the benchmark price, some standards of premiums and discounts to be set and the pricing period within one month agreed on by the two sides.
The market participants generally believe that the signing of the first domestic iron ore basis trading contract will promote the application of the pricing model of "futures price + basis" in domestic iron ore trade, enhance the close integration of the iron ore futures and spot markets, and give full play to the pricing and hedging functions of the iron ore futures, so as to improve the service of the futures market for the real economy to a higher level. In addition, since there is not any authoritative futures price in the ferrous metals sector in the international market yet, the basis trading based on the iron ore futures prices of Dalian Commodity Exchange (DCE) will help improve China’s pricing power in this sector.
As a common form of trade in the international bulk raw materials market, the basis trading means that instead of setting the fixed prices when signing the purchase and sales contract, the buyer and the seller lock the basis based on the futures price of a designated exchange and before the shipment the buyer selects the futures price at some time point as the final transaction price. In this way, the commodity pricing power is transferred from the one-sided pricing of the upstream seller to the downstream buyer, thus giving both the buyers and the sellers the independent power to participate in the pricing. The sellers lock the quantity of sales for the commodities with the activeness of the downstream motivated, promoting the sales flow of commodities; the buyer can gain the power in price bargaining through their forward-looking grasp on the market, thus facilitating both sides’ use of the futures market in risk management and generating win-win results for both the buyers and the sellers. Domestically, the basis pricing has been commonly used in nonferrous metals, soybeans and other industries.
At the basis trading contracts signing ceremony and the forum on innovation of risk management model for iron and steel industry held in Rizhao on July 23, Dong Wenyuan, deputy mayor of Rizhao City, said that in recent years, with the severe price fluctuations of the international bulk commodities, the enterprises with the traditional “one-sided pricing” as the main pricing model are in the face of the fierce competition with the basis-pricing enterprises and are very likely to be eliminated from the industry. In the long run, it is the development trend for the business entities to tap into both the spot and futures markets and participate in and make use of the basis trading to reduce the business risks, and the basis trading model will see better promotion and application. The signing of the basis trading contracts between Rizhao Steel Holding Group and Yongan Futures and CITIC Resources will make mutual benefits and win-win results for the three companies, and for Rizhao City, it will improve the operation and management as well as the anti-risk capability of the enterprises in Rizhao and boost the development of the local real economy. Dong also said that as the iron and steel industry is the pillar industry in Rizhao enjoying priority in development, Rizhao Port is currently the country's largest iron ore import port, with the iron ore imports reaching about 120 million tons in 2013, accounting for one sixth of the total in China. Next, Rizhao City will further consolidate the foundation for the development of the financial industry, make efforts in improving the financial eco-environment, promote the healthy and rapid development of the financial sector with the most preferential policies, the best services and the most favorable environment, and further enhance the capacity of the financial industry including the futures industry for boosting the development of the real economy.
A DCE official said that the iron ore basis pricing is of the significance of milestone. During the designing of the iron ore futures, DCE considered how to better enable the enterprises to manage risks and how to make the iron ore futures better serve the real economy. During the 8 months since the listing, the iron ore futures have run smoothly, with continuously brisk trading, constantly increasing positions, the rapidly growing participation of the industrial clients and the price representativeness highly recognized by the market. On the basis of the smooth market operation, DCE is further deepening, refining and completing the iron ore futures product, its key strategic product, and exploring the development of the iron ore-related derivatives instruments, including swaps and options, as well as the instruments with indexes as the objects. Through the improvement of the iron ore derivative instrument, DCE is facilitating the more real and effective participation of more enterprises in the market and making the iron ore futures prices become the international prices that can represent the real demands of the international market. In the overall background of economic restructuring and transformation at present, the enterprises have stronger demands than ever for risk management. The futures industry will continue to seek more effective ways to provide better financial services for the enterprises, and as always DCE will support the futures companies, spot enterprises and financial institutions in developing more financial derivatives and providing comprehensive risk management services.
Du Shuanghua, Chairman of Rizhao Steel Holding Group, said that the signing of the iron ore basis trading contracts will open a new window on the basis of the traditional ways for the enterprises to use the futures instruments. It is an honor for Rizhao Steel to participate in the first iron ore basis trading contracts, with the hope of providing a way of reference and unprecedented experience for the industry in terms of the standardized development of the ore trading and steel trading in China, the sound and close integration of the futures and spot markets, and the stability and prosperity of the production, supply and sales in the industry.
Shi Jianjun, general manager of Yongan Futures, said that the basis pricing has just started in the iron and steel industry and in the field of ferrous metals on the international market there are not any authoritative futures prices yet. The basis pricing is different from the “one-sided pricing” and will further improve the pricing in the industry. The introduction of the basis pricing will result in freer pricing for both buyers and sellers as well as stabilize the purchase and sale relationship.
Market participants believe that the very core meaning of the pricing is to enable the spot enterprises to use the futures prices to guide production and business activities. Through the basis pricing model, the spot enterprises can improve the hedging efficiency, and make the risks for both sides of the trading contract spill over to the futures market on the basis of stabilizing the supply-demand relationship, so as to give better play to the role of the futures market in serving the real economy.
On the same day, the People's Government of Rizhao City and DCE signed a strategic cooperation agreement.
