Mondo Visione Worldwide Financial Markets Intelligence

FTSE Mondo Visione Exchanges Index: 100,208.96 -762.53

Dalian Commodity Exchange Reduces Minimum Quantity Requirement For B / L Delivery Application Of Iron Ore

Date 28/10/2015

On October 23, Dalian Commodity Exchange (DCE) issued a notice that it will adjust the quantities applied for bill of lading (B / L) delivery of iron ore from 40,000 tons or its integer multiples to 10,000 tons or its integer multiples, and the new rule shall come into effect starting from I1601 Contract. According to the analysis on the market, the adjustments will make the B / L delivery system more adaptable to the actual situation of the iron ore spot market at present, increase the chances of successful response, and give better play to the role of the system in improving the market efficiency and serving the real economy.
 
As the iron ore is a typical low-value bulk commodity, the clients are sensitive to the costs and losses caused in port operation, transportation and other processes. In response, when designing the contracts and systems of the iron ore futures, DCE created the B / L delivery system based on the processes of export and spot trade at ports. With the buyers selecting the locations and the sellers responding, the system was designed to solve the problem of reverse logistics possibly caused by the ordinary warehouse receipt delivery, facilitate the process of directly transporting the  afloat cargoes en route to the places demanded by the buyers, and save the in and ex-warehouse costs and costs for transferring the goods.
 
In actual implementation of the systems, because of the stable operation of the iron ore, when all contracts enter the delivery months, the futures prices rationally converge to the spot prices, resulting in the lack of space for arbitrage. Approaching the delivery months, the spot enterprises have changed the positions to contracts of other months, resulting in small trading volumes of iron ore, which means that despite the rationality, the design of the futures system has caused the small number of ordinary selling corporate clients with the open interests of more than 400 contracts (about 40,000 tons) in the delivery months and the low proportions of the number of the selling clients meeting the requirements of the B / L delivery system for positions, reducing the chances of successful response to B / L delivery. The data shows that during the periods of application for bills of lading for the Contracts of I1405, I1409 and I1501, the numbers of the selling clients meeting the requirements for the positions in applying for B / L delivery are only 3, 6 and 9, accounting for 13.9%, 21.6% and 19.2% respectively of the total ordinary corporate clients of the contracts.
 
At the same time, the changes that have taken place recently in the iron ore spot market have made the clients less active to some extent in using the B / L delivery system to hedge against risks. In 2014, because of the existence of the financing ore, long-term price inversion was seen between the prices of the spot goods at ports and the afloat goods (with the spot prices at ports RMB 30 / ton lower than those of afloat goods on average). In addition, the clients using the B / L delivery system to hedge against risks for afloat goods  need to correctly predict the shipping dates and avoid the risks of default, with higher requirement for control of time nodes. Therefore, in the delivery process, the sellers prefer to directly carry out iron ore delivery after putting the goods in warehouses at ports, considering the costs and risk control.
 
In the meantime, in practice, because of incomplete understanding of the system, some clients have the misunderstanding that the B / L delivery system can only be used in delivery of afloat goods. In fact, the iron ore futures contract and delivery system allows the use of spot goods at ports in delivery in the form of B / L delivery. Therefore, for the clients intending to participate in B / L delivery, the means are complete in utilizing the system, which can totally cover and control the risks caused by the uncertain shipping dates and other changes in the spot market.
 
A market participant said the quantities applied for B / L delivery adjusted by DCE to 10,000 tons and its integer
multiples not only significantly increase the number of the clients meeting the requirements for positions, but also more adapt to the actual situation of the spot market and give better play to the role of the system in serving the industrial enterprises. With regard to the I1501 Contract, for example, after the adjustment to the applied quantities, the average number of the selling clients meeting the requirements for positions has been increased from 9 to 17, with the proportion in the number of the ordinary corporate clients for the contract improved from 19.2% to 35.8%.
 
In the context of relatively tight funds for the entire iron and steel industry at present, the sizes of the spot trade at ports are mostly at about 10,000 to 20,000 tons. According to the transaction data of China’s iron and steel electronic trading platform, by early 2015, the ports recorded a total spot transaction of 471 contracts (about 6.1 million tons), most at 10,000 to 20,000 tons for a single contract, with an average transaction of 13,000 tons per contract. Therefore, after the minimum delivery unit of B / L delivery is adjusted to 10,000 tons, the industrial clients can not only conduct hedging for afloat goods through the system, but also promote the participation of the spot goods at ports in delivery on the basis of the B / L delivery system when it is necessary. Data show that the adjusted quantities in application will increase the proportion of the transactions meeting the requirements for B / L delivery system in the actual transactions of the spot market from 4.03% to 69.85%.
 
An official of the industrial products business division of the DCE said that DCE has adequately solicited opinions on the above adjustments from the members and industrial clients, and all market participants have expressed support for the adjustment plan. In the future, DCE will continue to strengthen promotion of the B / L delivery system in marketing, further facilitate the industrial clients’ utilization of the system and give better play to the role of the system in serving the real economy.