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Dalian Commodity Exchange (DCE) releases the “Notice on Amendments to Relevant Rules on Implementing Brand Delivery System of Iron Ore Products” on September 12, which specifies the deliverable brands of iron ore products and introduces the brand premiums and discounts on the basis of quality premiums and discounts. The amended rules will enter into force from the launch of Iron Ore Futures Contract 2009. Implementing the brand delivery system will help to set products with the higher market acceptance as target delivery products, thus further increasing the representative of iron ore futures prices.
Conducting in-depth research to design brand delivery mechanism as to satisfy the market demand
A DCE official introduces that to further draw close to the market’s reality, DCE has made extensive surveys on all parties along the iron ore trade chain, such as mines, steel plants, trading companies and ports and has formulated the brand delivery mechanism of iron ore products after in-depth research. DCE has restricted the scope of delivery products by setting up requirements on brands, adjusted the previous quality premiums and discounts and added the brand premiums and discounts; and DCE has required the brand certification through documents and innovatively set the investigation group system to deal with brand disputes.
In particular, DCE has set up deliverable brands for iron ore futures and selected 9 import ores and 2 domestic ores as the first batch of deliverable brands given their liquidity, quality and other aspects. The deliverable brands are PB Fines, BRBF, Newman Fines, Mac Fines, Jimblebar Fines, Roy Hill Fines, Super Special Fines, FMG Blend Fines, Carajas Fines, HBIS Concentrates and Ansteel Concentrates, and only these brands are allowed to be used for delivery. “All 11 brands are main ores used in the manufacturing by steel plants and are of good spot good representative.” said the chief of the Futures Department of a large steel enterprise.
DCE has set the brand premiums and discounts. As there are brand premiums in the spot selling of iron ores, the price will be affected by the quality of different brands, as well as their liquidity, quality stability and other factors. The newly-added brand premiums and discounts will reflect the quality of different brands and also the influence of other factors on price difference among brands. At present, PB Fines is set as the benchmark product, with the premiums and discounts of RMB 0 / tonne. Given the price difference before, the premiums and discounts of other brands are set as bellow: RMB 0 / tonne for Newman Fines, RMB 20 / tonne for BRBF, RMB -20 / tonne for Mac Fines and Roy Hill Fines, RMB -25 / tonne for Jimblebar Fines, RMB -90 / tonne for Super Special Fines, RMB -75 / tonne for FMG Blend Fines, RMB 35 / tonne for Carajas Fines, RMB 15 / tonne for HBIS Concentrates, and RMB 0 / tonne for Ansteel Concentrates.
DCE has also adjusted the quality premiums and discounts. As iron ore products of the same brand present quality difference in different batches in the spot market, the quality premiums and discounts can reflect the influence of quality standards on downstream users. With regard to the standards of Iron (Fe), Silicon Dioxide (SiO2), Aluminum Oxide (Al2O3), Sulfur (S) and Phosphorus (P), the quality standards and the premiums and discounts have been adjusted as follow after inspecting downstream steel plants and referring to the discount standards of Mysteel and Platts: the quality standard of Fe is 62%, and the price will be deducted by RMB 1.0 / tonne for every 0.1% lower than the standard and increased by RMB 1.0 / tonne for every 0.1% higher than the standard; the quality standard of SiO2 is adjusted to no more than 5%, and the price will be deducted by RMB 1.0 / tonne for every 0.1% higher than 5%; the quality standard of Al2O3 is adjusted to 2.5%, and the price will be deducted by RMB 1.0 / tonne for every 0.1% higher than 2.5%; and the quality standard of P is adjusted to less than 0.10%, and the price will be deducted by RMB 5.0 / tonne for every 0.01% higher than 0.10%.
Compared with the previous contracts, the deliverable ores after the implementation of the new system will have both brand premiums and discounts, and quality premiums and discounts. Taking BRBF (Fe 62.5%, SiO2 5%, Al2O3 1.8%, P 0.08%, S 0.00%) for an example, its brand premiums and discounts is set at RMB 20 / tonne and, according to the adjusted quality standards and premiums and discounts, its quality premiums and discounts will be RMB 5 / tonne. In this way, the total premiums and discounts of BRBF is RMB 25 / tonne. “The deliverable brands and the brand premiums and discounts have been set according to the current market situation. DCE will pay close attention to the changes in the spot market and make corresponding adjustment.” said the DCE official.
As for how to certify iron ore brands, DCE has sorted relevant documents along the trade chain from the delivery of goods at mines to the arrival and trade at ports and, after several market demonstrations and given the feasibility of brand certification, and selected 4 documents that are available for every party along the trade chain to provide: the certificate of quality, the certificate of goods ownership, the bill of lading and the stack position statement. In spot trading, the name of vessel, voyage number (or sail schedule), and the delivery order number are three key information like the coordinates that show the position (the specific stack) of iron ore products at port. And the brand specified in the certificate of quality, the certificate of goods ownership and the bill of lading should be the same. For domestically produced iron ores, they are only allowed to be delivered at factory warehouses producing such brand and should be equipped with the quality certificate issued by the manufacturer.
As the deliverable brands are all mainstream ores of high and stable quality in the spot market, the warehouse will not make quality inspection on loading-in commodities, but remain the right to require the owner to make brand guarantee in the form of promised goods exchange and pledged margin. If the warehouses believe the to-be-delivered goods are of non-standard quality, it can engage a quality inspection agency designated by the Exchange for quality inspection of the loading-in commodities and re-examine their quality.
Besides, DCE will set up an investigation group constituted by experts engaging in iron ore manufacturing, trading, consumption, customs, port, freight forwarder, shipping agent and etc. to investigate the authenticity of iron ore brands. Overseas exchanges, like the CME, have the committee with arbitration right to settle disputes in trading, clearing and delivery. However, domestic exchanges have no such right. With the further participation of overseas clients, the inspection group will serve as a choice for the Exchange to settle the possible delivery disputes of the clients.
Increasing market’s acceptance and ensuring sufficient deliverable amount
There are four stages in the brand delivery of iron ore products. First, the seller submits the certificate of quality, the certificate of goods ownership and other documents to the designated delivery warehouse, and the designated delivery warehouse then verifies the brand of iron ores by checking the documents provided by the owner, the preserved bill of lading, the recorded stack position and confirming with the freight forwarder or shipping agent. Second, the designated delivery warehouse uploads the certificate of quality, the certificate of goods ownership, the bill of lading and the stack position statement to the Exchange after brand verification and applies for the registered warehouse receipts. Third, the designated delivery warehouse provides documentary evidence to the buyer when the buyer picks up the goods. For directly imported iron ores or iron ores processed at port, the documentary evidence includes the certificate of quality or its photocopy, the certificate of goods ownership, the bill of lading and the stack information. For domestically produced iron ores, the documentary evidence is the certificate of quality issued by the manufacturer. Fourth, if there is any objection on brand, the buyer can raise such objection to the Exchange, and the two sides in dispute and the Exchange will choose 3 experts from alternative members to form an investigation group to investigate the brand authentication and submit an inspection report to the Exchange. In case of any fabrication in the brand, the two sides shall make a negotiation first, and then the designated delivery warehouse will make goods exchange and compensation if there is no consensus after negotiation.
It is introduced that the brand delivery mechanism is close to the spot market conventions and will help the futures market to better serve the spot industry. First, it will increase the market acceptance of delivery goods and the operation quality of iron ore products. As the selected delivery brands are ores mostly used by middle and downstream clients, the brand delivery mechanism will fully increase the enthusiasm of steel plants to take part in the futures trading, enable industrial clients to make use of the futures market to avoid spot price fluctuation risks, and enhance the hedging efficiency.
Second, the mechanism will increase the deliverable amount. Lao Hongbo, Vice General Manager of CIEC Group, believes that despite the decrease in the number of deliverable ores in the brand delivery mechanism, the Super Special Fines and the FMG Blend Fines have been added, which has, in fact, increased the deliverable amount.
Third, this will improve the willingness to receive shipment and reduce the delivery cost for both buyers and sellers. For buyers, the restriction of delivery products to mainstream brands in the market and the clear shipment prospection will avoid the unexpected shipment which buyers could not handle. Under the current brand delivery mechanism, to ensure the quality of delivery goods, the seller should make quality inspection on loading-in commodities. The brand delivery mechanism requires the seller to offer the certificate of quality, and the warehouse, if has no objection, can exempt the goods from quality inspection, which is expected to reduce the stack transfer and inspection fee by RMB 8.5-11 / tonne.
Fourth, the price representative will be strengthened. The brand delivery mechanism, by introducing the brand premiums and discounts, will make the quotation price represent the brand price in most situations. The price deviation in a few cases will occur to mainstream ores of medium and high quality and with relatively high market liquidity and acceptance. At worst, the price deviation will be within the deliverable brands. Therefore, the futures prices will still represent those of mainstream ores with the high market acceptance.
