Dalian invites foreign iron ore speculators

Via Xinua:

China will introduce foreign investors to trade in domestic iron ore futures from May 4, according to the country’s securities regulator.

The iron ore futures are traded on the Dalian Commodity Exchange, which rolled out rules in late March to guide foreign investors to participate in the market and took a market test earlier this month.

Introducing foreign investors into the domestic iron ore futures market will help develop a widely accepted price benchmark and boost global iron ore trade, according to the Dalian Commodity Exchange.

What will this do? The opposite of what theory says it should. Futures are supposed to smooth volatility in markets by enabling hedging. In practice they do the opposite by enabling synthetic gambling on the underlying commodity price which over time comes to drive rather than hedge it.

Since Dalian futures were introduced for iron ore, volatility in both the price and inventory cycles for iron ore has rocketed. This will make it worse still with lower lows and higher highs. At this stage of the cycle it will be the former before any experience of the latter. Perhaps the locals would like to offload some dud contracts beforehand.

Australian sovereign wealth fund anyone?

Comments

  1. ResearchtimeMEMBER

    Panic is starting to set in – Traders now want to off load their inventory… lack of buyers. This ladies and gentlemen, is their new best idea.

    • This was my first thought too. If someone’s going to take a bath, let it be the foreigner! But I presume foreigners can go short too…

  2. The Traveling Wilbur

    This will make it worse still with lower lows and higher highs. At this stage of the cycle it will be the former before any experience of the latter.

    It would appear we have a market! I’ll take some of that action!! (not sure how, maybe if you’re right I’ll take another sub and if I’m right it’s free!!!)

    Curious though about AUD and XJO effects. The HIGHER exchange price for IO will drive AUD up. That usually impacts XJO negatively. But this is an IO driver, so will XJO rise too instead of falling?

  3. Never understood why the miners haven’t done any hedging in the past, perhaps they haven’t had access to the liquidity Dalian can provide?

    But CME futures and Singapore swaps have always been open, so how much difference will this make?

  4. Are you sure the coincidence is causative?
    Couldn’t it be the changes in supply of ore? Or changes in the steel production? Or some other factor like centralised Chinese control?