Last week’s price trends continued on Friday with the 12 month swap rising another .76 cents to $118.56. Spot was flat and rebar fell another 6 yuan to 3499. The news today is all about Friday’s open of iron ore futures on the Dalian Exchange. From Reuters:
The Dalian contract is the world’s first iron ore futures that is backed by physical delivery, and being denominated in yuan it can easily draw on the massive untapped hedging potential inChina.
…Volume on the Dalian exchange for the most-active May iron ore contract hit 300,818 lots, around the same first-day level for recent futures contracts that China launched such as thermal coal and bitumen.
The traded volume is equivalent to about 15 million tonnes. By comparison, top global iron ore swaps clearer Singapore Exchange handled a total 20.4 million tonnes in all of September.
…The base price of 960 yuan, stripping out value-added tax and other costs, is equivalent to about $129-$130 a tonne for imported 62 percent grade iron ore cargo that includes freight cost, traders said.
…The price moves in Dalian caught swaps traders off guard on Friday, with the May futures, which closed at the equivalent of around $133 in Dalian, at a premium over the May swaps contract which settled at $123.25 on Thursday, traders said.
“If I were a miner right now and I could sell May next year at that price, that’s quite a good price versus swaps,” said a Singapore-based broker.
…Foreign companies and banks can trade Chinese commodities futures through local units that are registered in the country.
This is another possible explanation for the sudden rise in the value of Singapore based swaps. I haven’t been able to determine if the Dalian Exchange offers 12 month futures (am working on it) but the implied pricing of the May futures shows there would be a significant spread between swaps and futures. If so, given the huge volume already apparent in Dalian, you would expect the swaps to track higher and close the arbitrage. Traders may have anticipated this and leaped upon swaps in advance of the launch.
I will continue my inquiries.
