Iron ore trade with reference to 'China price' is expected to become a trend

Recently, Vale of Brazil, the world's largest iron ore producer, signed two basis trade contracts with large domestic iron and steel enterprises such as Shandong Laigang Yongfeng international trade (hereinafter referred to as "Yongfeng international trade") based on the iron ore futures price of Dalian Commodity Exchange (hereinafter referred to as "Dashang"). Relevant market people said that for a long time, as the world's largest iron ore importer and trading country, China lacks the influence to match the huge scale of international iron ore pricing. In the iron and steel market, the voice of using RMB to price and settle accounts and promoting the basis trade mode is endless. With vale and other foreign giants joining in the ranks of RMB denominated iron ore trade, the use of RMB denominated international iron ore trade sales is expected to become the industry trend. In recent days, Vale of Brazil has signed a basis trade contract with domestic steel enterprises. The price benchmark of the two sides is the 2005 iron ore futures contract of Dasco, and the ore type is set as BRBF.

Domestic steel enterprises use iron ore futures market to hedge risks. This marks that the world's largest iron ore producer attempts to use China's iron ore futures price as a reference for trade pricing, which will become a classic case of international iron ore market. According to Li Chao, general manager of Yongfeng international trade, vale and Yongfeng international trade's basis trade mode is a typical seller's price calling mode. Both parties take "futures price + basis" as settlement price, and vale as the seller has completed the point price several times during the point price period. The two sides fully combined Vale's spot sales price and Yongfeng international trade's purchase demand, determined the spot price of iron ore futures 2005 contract, and determined the basis by referring to the domestic spot price difference. Specifically, the average difference between the BRBF price of Shandong Port and the closing price of iron ore futures 2005 contract published by Mysteel at 18:00 every day is the basis. Meanwhile, the contracted iron grade is 62.5%, while the actual delivered iron grade is 63.3%, an increase of 0.8%. According to the contract agreement, for every 1% increase in iron grade and 10 CNY/ton increase in price, the final price is 8 CNY/ton increase in futures price plus basis difference. Within 5 consecutive working days after the basis is determined, the seller vale can issue the starting price.

After the price point, the buyer uses the derivatives market for risk hedging. In the actual business, the buyer can pay the total payment according to an expected price to complete the spot transaction. After the seller points out the price, the final trade price will be formed according to the point price, the basis determined in advance, the iron grade premium and so on, so as to settle the payment according to the facts, and refund more and make up less. In this way, the operation mode of "delivery first and price later" can carry out business more flexibly on the premise of protecting the interests of both parties and hedging price risk. Before this basis trade, Vale explored and tried to mix ore production in Chinese ports as early as 2015, and launched RMB spot sales in Chinese ports in 2017. Vale's RMB spot sales reached 18 million tons in 2018. In the near future, Vale uses futures price as reference for spot sales, which is a new pricing mode for overseas mines after long-term cooperative pricing and Platts index pricing mode. In the past, the international iron ore trade is expected to change with the price of Platts index as the basis and the dollar as the settlement currency. As a matter of fact, overseas mines are priced in RMB and futures in international iron ore trade, and vale is not an example. It is understood that Rio Tinto and FMG also set up a China trading company this year to carry out RMB denominated spot trade in Chinese ports, whose prices refer to port spot and futures prices.

At present, the competition of iron and steel industry is becoming increasingly fierce, and the price fluctuation of raw materials and products has become the main risk source that affects the development of domestic and foreign industrial chain enterprises. Especially this year, under the multiple influences of overseas mining disaster, hurricane weather and domestic demand adjustment, iron ore price has experienced "roller coaster", which has brought great challenges to domestic and foreign enterprises. In recent years, some domestic iron and steel enterprises have combined traditional trade with derivative instruments, explored to carry out period to present integration and make full use of futures instruments on the basis of deep integration of the whole industrial chain, and constantly innovated and improved the iron ore trade mode.

Yongfeng international trade has carried out base trade with international mines and traders for many times before, and has been in the forefront of the industry in the exploration and utilization of futures instruments. In Li Chao's view, the basis trade model has three advantages compared with the traditional long-term cooperation and the price fixing model of the Platts index. First, the pricing cycle is more flexible. Enterprises can choose a pricing cycle that meets their own needs. They do not have to limit the cycle to a certain period of time like the traditional long-term cooperation and index pricing model. Second, it is easy to achieve risk prevention and control. The futures market provides an open, transparent and real-time price signal, allowing enterprises to dynamically manage transactions and inventories according to market changes. No matter what pricing method is adopted by both parties, the default risk can be greatly reduced by designing business process in advance. Third, increase the transparency of pricing. The futures price formed by a large number of industrial enterprises and investors' open trading is more fair and can reflect the supply and demand pattern, thus avoiding the limitation that the small sample of index pricing determines the large market. According to relevant market personages, downstream steel mills can get goods in advance and price flexibly through basis trade to lock in costs and profits. Compared with the absolute price change, the fluctuation range of the basis is smaller, and the basis trade is more convenient for steel enterprises to reduce transaction risk. It is not only downstream steel plants that benefit from basis trade. For the mine, the basis trade adopts the seller's mine point price mode. On the premise of not entering the futures market, the mine sells the port spot in the way of RMB pricing and futures price as the benchmark, so as to better grasp the pricing power while hedging the risk. "Basis trade is flexible and provides the buyer and the seller with the tools of pricing in RMB and managing price risk. With the increasing popularity of port trade and RMB pricing mode, the basis trade mode can enrich the spot trade pricing mode. " Vale said.

Guoxin futures is a service provider for vale to carry out basis trade. Yu Xiaodong, general manager of Guoxin futures, said that the basis model is flexible and diverse, and the price counting party and delivery date can be selected through consultation, which is conducive to the business development of both parties in combination with their own characteristics and to win-win cooperation. "For the upstream mines, in the long run, basis trade is conducive to the mines to lock in reasonable production profits and expand sales channels. For the downstream steel plants, carrying out basis trade can lock up resources in advance, optimize inventory management and procurement process, and achieve cost reduction and efficiency increase. " At present, the amount of iron ore trade promoted by overseas mines and domestic enterprises is still limited. However, with the rise of RMB pricing mode of iron ore, the dominant position of the dollar and the Platts index in international iron ore trade has been loosened. In the view of relevant market participants, the RMB pricing mode of iron ore has gradually become a trend, which is in line with the upstream and downstream interests. The reporter learned that in addition to hedging price risk, the introduction of RMB pricing and settlement of iron ore and the development of futures basis trade in overseas mines are closely related to the change of sales mode. Ma Liang, a researcher at Guotai Junan (Hong Kong stock 02611) Futures Industry Service Research Institute, told reporters that for overseas mines, the transportation distance from selling iron ore to the Chinese market in the past was long, and the time cycle was long. If RMB was used for settlement, they would face greater exchange rate risk during the period, and they preferred to choose the more common international dollar as the settlement currency. However, in recent years, overseas mines such as vale have moved ore blending and sales to domestic ports, largely overcoming the risk of uncertainty brought by a long time span. After ore blending in domestic ports, it will directly land for sales. It is more effective and convenient to adopt RMB one price method, which is also conducive to the expansion and maintenance of Chinese enterprise customers.

Putting the market in front of Chinese ports can increase port cargo throughput and be closer to the Chinese market. The pricing method is bound to follow the market. More reference should be made to China's spot price and RMB settlement method. " Mengchun, Vice Minister of Futures Trade Department of Benxi Iron and Steel Group sales center, told reporters. There are many reasons for overseas mines to take the initiative of RMB pricing and sales, according to relevant market participants. Among them, China's iron ore futures play an important role. Especially after the introduction of foreign traders in May last year and the realization of opening to the outside world, China's iron ore futures have become increasingly influential in the international market. More and more foreign industries pay attention to the price of iron ore futures and try to use the futures price to price. As of the end of October this year, more than 110 overseas customers from 15 countries and regions, including Singapore and Australia, have participated in iron ore futures trading. As the largest buyer of iron ore in the world, Chinese iron and steel enterprises are the direct beneficiaries of iron ore RMB pricing. Wang Chao, deputy general manager of Shanxi Gaoyi iron and Steel Co., Ltd., introduced that the 170000 ton iron ore trade concluded between the company and Rio Tinto was based on the spot RMB price of the port on the day when the goods were cleared as the final settlement price. The purchase quantity was determined by the buyer, which was convenient for the iron and steel enterprises, and also reduced the exchange rate risk brought by pricing in USD.

In the process of implementing the pricing of iron ore in RMB, iron ore futures will play the role of price benchmark, that is, to price by referring to the price of iron ore futures and the range of premium and discount agreed by both parties. " Zhai Hepan, head of black research at CCB futures, said that if iron ore trading parties can learn from the basis pricing mode commonly used by other international bulk commodities, relying on the market size and influence accounting for more than half of the global iron ore consumption, the open and transparent iron ore futures price is expected to replace the Platts index in the future and become the main pricing reference. With the development of internationalization of dashangsuo iron ore futures, dashangsuo iron ore futures denominated in RMB will become an important financial pricing tool in the global iron ore trade in the future, and futures tools will become one of the main driving forces to promote the internationalization of RMB. " A senior analyst at China investment trust futures said. There is a long way to go in the pricing mode of RMB. Although the price of iron ore is still based on the Platts index, the open and transparent futures price gradually shows its influence in iron ore trade. According to Zhai Hepan, as China's industrialization and urbanization enter the middle and later stages, the steel demand increases and decreases, and the scrap steel resources become increasingly rich, the global iron ore market is gradually transitioning to the buyer's market, and the RMB pricing mode to meet the needs of Chinese customers emerges at the historic moment. He predicted that foreign mines engaged in iron ore export, iron and steel producers engaged in iron ore import and ports engaged in international trade of iron ore in the future will have to gradually change from the original index pricing mode to the futures pricing mode based on the iron ore futures of dashangsuo. In the future, the proportion of iron ore denominated in RMB will gradually increase. Although the RMB pricing mode of iron ore represents the development trend of iron ore trade in the future, there are still many obstacles in the current large-scale promotion.