Iron Ore futures debut in Dalian Commodity
Exchange (18 Oct 2013)
Dalian in China launched the first physical
Iron Ore futures. Making a difference to
the cash settled index based contracts listed in CME, Singapore Exchange and
Intercontinental Exchange. China is the
biggest user of Iron Ore and 74.6 million tons of Iron Ores were imported in
September according to a Bloomberg article.
Market participants are observing how Dalian
Commodity Exchange handles the physical settlement. The standard is supposed to be 62% iron
content but in real life, every piece of ore will have some difference in Iron
content.
Local Iron Ore miners in China see this
physical settled contract as a new way to sell their stock. Currently, big buyers of Iron Ores like State
owned Enterprises are asking for 60 – 90 days payment terms from miners. Funding is tight in China in general as banks
are not willing to lend. Everyone
remembers the liquidity squeeze in June and the coming December yearend will be
very tight. Some miners, who are keen to
get liquidity, are willing to sell iron ores at a discount for cash
upfront. The discount could be as steep as
5%. Now this is before the Dalian
physical settled contract. If the
physical settlement process is smooth, there is a carry trade angle to buy
physical from miners today and sell futures to hedge. Assuming the physical goods meet the
settlement standard and delivery process is tidy, there could be room for arbitrageurs.
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