DCE: Promoting the internationalization of iron ore options
On October 22, the reporter learned at the 2020 China Coal and Coke Industry Conference that since the beginning of this year, affected by complex factors such as the COVID-19, the price of commodities such as coal has fluctuated sharply, and the production and operation pressure of upstream and downstream enterprises in the steel industry chain has continued to increase. The demand for risk management by using the derivatives continues to increase. In this context, DCE continues to optimize the rules and regulations of futures contracts to provide support for comprehensively promoting the high-quality development in the steel and coal industries.
Yufei Wang, the general manager of DCE, stated in the above-mentioned meeting that in terms of contract rules and regulations, DCE has adjusted the quality standards for coal delivery in a timely manner since 2018 in accordance with changes in the spot market. The new standards have been implemented since 1907 coking coal contract. At present, four physical deliveries have been completed, and the quality of delivered products has been significantly improved. In order to effectively alleviate delivery pressure and ensure smooth delivery, DCE has implemented a rolling delivery system for the first time, started from the 2009 contract of coke varieties, and is currently actively studying and demonstrating the adjustment of coke futures quality standards.
According to the report, the continuous optimization of the contract rules system has led to a steady improvement in the efficiency of market operations. In the first September of this year, the average basis of coal and coke main contracts further converged to 55 and 144 yuan/ton, and the price discovery function was further exerted. The trading and holding volume of coking coal that the institutional customers have, accounted for 42% and 55%, respectively, and the trading volume and holdings of coking coke that the institutional customers have, accounted for 34% and 44%, respectively, a significant increase from the previous year. In addition, after the market makers enter the market, the transaction volume of non-major coking coal and coke contracts has increased rapidly. The transaction volume in September this year accounted for 32%, which was a substantial increase from last year, and the continuity of contracts was significantly improved.
It is understood that since the beginning of this year, in order to reduce the impact of the Covid-19 on upstream and downstream enterprises in the steel industry chain, DCE has taken the initiative to lower the standards for daily handling fees for coking coal and coke, reduce iron ore outbound and storage costs, and introduced a differentiated margin policy, waive the delivery fee and the standard warehouse receipts are used to offset the margin occupation, and reduce the hedging transactions fees for industrial enterprises by 90%.
At the same time, DCE has actively promoted the development of over-the-counter business, and since the end of 2018, it has successively launched commodity swap, basis trading and standard warehouse receipt trading services. The commodity swap business includes coking coal, coke, and iron ore. As of the end of September this year, a total of 73 coal and coking ore swap transactions have been carried out, with a cumulative nominal principal amount of 688 million yuan. The business model covers single commodity swaps, index swap and the spread swap.
In addition, DCE is exploring innovative market services, targeting the steel and coal industries, and actively implement the "DCE Corporate Risk Management Plan", industry associations, information institutions, and industry finance bases to strengthen the cultivation in the leading industrial enterprises. Since 2019, in terms of coal and coking ore varieties, a total of 20 companies have carried out DCE’s over-the-counter options and basis trading projects, and are providing the customers with new a trading pricing method based on "futures prices + basis" as well as providing a customized risk management tools.
Yufei Wang pointed out that in the next step, under the guidance of the China Securities Regulatory Commission, DCE will pay more attention to the improvement of market operation quality and market function, in order to better serve the industrial enterprises, to strengthen the risk management, and to continue to enhance the ability to serve the steel industry chain.
Specifically, DCE will continue to improve the variety and tool system. It will steadily promote the listing of scrap steel futures and the internationalization of iron ore options, and provide industrial customers with more varieties and more comprehensive hedging products and tools. "One product, one policy" promotes the function, and the implementation of the adjustment of coke quality standards; it accelerates the study of iron ore average price contracts; by reducing the position restrictions, lowering the margin standard for transactions near the delivery month, and improving the warehouse receipt service and market maker system. DCE will continue to improve the continuity of relevant futures contracts, increase the number of delivery factories and warehouses as well as the domestic mine delivery brands, DCE will also actively study brand premium and discount adjustments, and facilitate industrial enterprises to participate in the market.
At the same time, we will increase the efforts to build the OTC market in order to serve the diverse and individual needs of industrial enterprises. Focusing on the goal of building the OTC market as a "commodity ecosystem, price information center and trading center", DCE will continue to promote in-depth exchange transactions including coal and coke varieties, explore the construction of coal and coke and other types of sector in OTC market, and the circle members will be involved. DCE will speed up the online registration and transaction of non-standard warehouse receipts for iron ore and other varieties in order to provide liquidity for warehouse receipts and spot transactions, and promote the formation of a product chain and a fair price system that integrates coal and coking ore varieties, futures and stocks, and better serve the related companies with more targeted spot and derivatives business services
The coal coke and coal futures market has gone through nine and a half years in China. Hong Zhang, General secretary of the China Coal Industry Association, stated at the above meeting that though the stage of beginning and exploration, now we have entered a stage of steady development. New ideas, new business formations, and new models continue to emerge, and the function and role of the coal futures market has gradually been effective. He said that it is necessary to study the establishment of an information exchange mechanism between the spot market and the futures market, a price interaction mechanism, as well as price stabilization mechanism to prevent abnormal price fluctuations caused by malicious speculation, after that, we can make guarantees to build a healthy development of the coal futures and options market.