The announcement on soliciting public opinions on the adjustment of iron ore futures contract and relevant rules was released by Dalian Commodity Exchange (DCE) on May 11, and the adjustment of related rules and business will be implemented on the new contracts. The opinions could be sent before May 15, 2021. Market participants believe the plan released this time will reduce the Fe content requirement of standard product, reflect the features of further expanding resources available for delivery and better meeting industrial demand. This also keeps in line with new market trend. As stated in the plan, the rolling delivery will be implemented on iron ore futures, which will make it easier for enterprises to participate in delivery and promote the smooth development of iron ore futures trading and delivery.
Reduce Fe content requirement of standard product, optimize quality and brand premiums/discounts
It is learned that since September 2019, DCE has implemented brand delivery mechanism commencing with the I2009 contract month. Nine imported ore brands and two domestic ore brands were set as deliverable brands according to relevant quality standard. Brand premiums and discounts were introduced on the basis of quality premiums and discounts so as to better meet the steel mills’ demand of production material and make futures price more representative for spot market. DCE has added six deliverable brands according to market conditions and industrial demands since last year. Currently, there are 17 brands available for delivery, and every year approximately 620 million MT domestically-used iron ores can meet the delivery requirements, which effectively expanded the resources available for delivery.
Iron ores are resource-dependent products with poor standardization. For the past few years, under the impact of COVID-19 at home and abroad, changes in spot supply and demand, and monetary policy, etc., the relationship between supply and demand of spots for various brands showed considerable differences, and the spread between different brands was also in frequent and large fluctuation. For example, since early 2019, the minimum Carajas-PB spread and SSF-PB spread were 40 CNY/MT and -62 CNY/MT. The maximum Carajas-PB spread and SSF-PB spread were 249 CNY/MT and -410 CNY/MT, accounting for nearly half of iron ore’s prices, respectively.
However, the stability requirement of futures contract underlying and the relatively fixed brand premiums/discounts result in the inconsistency between the dynamic spot brand spreads with the relatively fixed futures premiums and discounts. Some brand and quality premiums/discounts may be inconsistent with the spot market fluctuation. On such basis, by working with industrial organizations, DCE conducted further research on iron ore contract, rules, premiums and discounts, and then formulated the amendment plan referred to herein.
According to the plan, the reduction of Fe content of futures standard product is highlighted in the adjustment of contract and related rules, decreasing from62% to 61%. Meanwhile, the quality premiums and discounts are still principal and optimized together with brand premiums and discounts on the premise of limited deliverable brands. After adjustment, the spreads between different brands will be mainly reflected in quality premiums and discounts. The brand premiums and discounts that are weakened but properly configured will facilitate the delivery of brands with large spot trading volume.
The market experts also say that the Fe content of ores in spot market has declined in recent years as mines continue to be exploited. By measurement, the mean Fe content of mainstream medium-grade iron ores is 61.4%. DCE will reduce the Fe content of standard product from 62% to61%, which is in line with the current Fe content of mainstream iron ores in market and actual demands of domestic steel mills.
On the basis of adjusting Fe content of standard product, DCE will also optimize and adjust the futures quality premium/discount and brand premium/discount. As for quality premium/discount, first, DCE will implement additional quality requirements, setting allowable ranges of Fe content indicator as 56% or above and allowable ranges of SiO2, Al2O3, SiO2+Al2O3, phosphorus and sulfur as 8.5%、3.5%、10.0%、0.15%和0.20% or below. Second, DCE will optimize the range and standard of premiums and discounts for indicators include iron, silicon, aluminum, phosphorus and sulfur. For example, when Al2O3 content falls within the interval of [1.0%,2.5%], there will be premium of 2.0 CNY/MT per fall of 0.1% compared with 2.5%. If it falls within the interval of [2.5%,3.5%], there will be discount of 3.0 CNY/MT per increase of 0.1% compared with 2.5%. Third, DCE will dynamically adjust premiums and discounts of Fe content. DCE proposes to set different premium and discount ranges of Fe content according to ore price ranges. To get closer to current spot market and try to avoid affecting market expectation, DCE will adjust the premiums and discounts of Fe content on a half-year basis, and release the information at the end of March and September every year. Those amendments will be implemented on contracts that have already been listed for half a year.
Suppose the above dynamic adjustment was made in the end of March 2020, and the mean daily settlement prices in the latest delivery months from October 2019 to March 2020 was calculated to be 696.67 CNY/MT, falling within the interval of [600,1200 CNY]. For Fe content, there will be premium/discount of 1.5 CNY/MT per increase/decrease of 0.1 % for medium-grade, premium of 2.5 CNY/MT for high-grade, discount of 3 CNY/MT for low-grade, applicable from the beginning of October,2020.
Given that dynamic adjustment of Fe content every half year may result in changes of premium/discount of delivered commodities between load-in and load-out, , DCE will adjust the validity of iron ore warehouse receipts to half year. Receipts can be deregistered in March and September every year so as to match the adjustment cycles of Fe content.
As for brand premiums/discounts, considering the premiums of brand ores with large import volume and inventory in spot market, DCE will set 15 CNY/MT premium for PB fines, BRBF and Carajas fines.
Narrow the spreads of economical delivery products and expand resources available for delivery
The reporter learned in the interview that these adjustments on contracts and related rules will be implemented on new contracts. After implementation, the economical delivery products of iron ore futures will still be the mainstream medium-grade ores in most cases while the spreads of economical delivery products will be further narrowed, and resources available for delivery be effectively expanded. It is estimated that the average spread between second and first economical delivery products of new contract will be reduced from 11 CNY/MT to 9 CNY/MT. The possibility of such spread remaining within 10 CNY will increase from 50% to 70%, and the inventory of economical delivery products will increase by nearly 30% on average.
Meanwhile, the market experts analyzed, after new contract is listed, the ratio of iron ore brand premium/discount taking up brand spread will decrease, which can increase the stability of the contract and rules. For example, under existing system, the quality premium/discount and brand quality/discount are 30 CNY/MT and 35 CNY/MT respectively for Carajas fines, totaling 65 CNY/MT. In the new plan, its quality premium/discount and brand quality/discount are 109 CNY/MT and 15 CNY/MT respectively, totaling 124 CNY/MT. The percentage of brand premium/discount among total premium/discount falls sharply from 54% to 12%. Similarly, the percentages of JMBF and SSF brand premium/discount are reduced from 45% and 55% to 0%, respectively. Furthermore, DCE will continuously support the delivery of domestic ores. Since the ratio of quality premium/discount increases after the adjustment, the premium of good-quality deliverable domestic ores also rises,sothe delivery of domestic ores will be further promoted.
Extend the delivery period of rolling delivery and promote delivery business to proceed in an orderly manner
At present, entity clients can participate in iron ore futures delivery by exchange of futures for physicals (EFP) and one-off delivery (mainly adopted in practice), and carry out matching and delivery pursuant to the rules of DCE.This amendment makes rolling delivery applicable, which is closer to the practice of spot trade and offers a new way for both buyers and sellers to participate in futures delivery. This will also effectively extend the delivery period, speed up the circulation of warehouse receipts, mitigate the impact of intensive delivery on storage capacity and transportation, and is conducive to the smooth delivery.
According to the plan, the seller client who holds both standard warehouse receipts and the unilateral selling positions of the delivery month may apply for rolling delivery from the first trading day of the delivery month but prior to the market close of the trading day immediately preceding the last trading day thereof. The seller who applies for iron ore rolling delivery shall declare the delivery to DCE prior to 11:30 a.m., and DCE announces approved application at 1:30 p.m. According to the application announced by DCE, the buyer may declare delivery intents to DCE prior to the market close so as to better match the buyers with the sellers and promote the conclusion of the intent for rolling delivery.
It should be noted that as a product opening up to overseas investors, there are bonded warehouse receipts and duty-paid warehouse receipts of iron ore futures. Both domestic and overseas clients can engage in futures trading and delivery. To maintain fairness, a unified matching will be performed to the buyer clients at home and abroad after the rolling delivery of iron ore is implemented. "Even though overseas clients may suffer losses as they are unable to issue VAT invoice when matched with duty-paid warehouse receipts, overseas clients seldom enter delivery months and participate in delivery in practice since the iron ore futures was opened to overseas investors. In addition, DCE will give priority to matching bonded warehouse receipts with overseas clients and matching duty-paid warehouse receipts with domestic clients in order to reduce the possibility of overseas buyers matched with duty-paid warehouse receipts." said the person in charge of the relevant business.
Some market participants noted that the rolling delivery had been implemented on a majority of futures products on DCE, which provides experience for the implementation on iron ore futures. The rolling delivery has become a major delivery method for coking coal and coke futures after the implementation on contracts delivered in September 2020. The ratio of rolling delivery of coking coal contract 2104 was 75%, and all delivery clients of coke contract 2104 adopted rolling delivery. The implementation of rolling delivery on iron ore futures will extend the delivery period and better support industrial sellers to participate in futures trading and delivery.
The person in charge of the relevant business also said DCE has solicited opinions on the amendment plan from multiple parties including industrial organizations, industrial enterprises and investors. After soliciting opinions, DCE will continuously take feedback from various parties, promote the implementation of amendment plan of contract and rules so as to further expand deliverable resources of iron ore, make it easier to delivery, prevent potential trading and delivery risks. DCE will also continue to maintain the smooth operation of iron ore futures, give full play to the functions of futures, and better serve the development of steel industry chain.
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