A new trading price mechanism for iron ore requires the joint efforts of many parties
This year, especially in the recent past, in response to the price fluctuations in the iron ore market, DCE has adhered to the bottom line of no financial risks, continued to strengthen market supervision, maintained normal market order, and stepped up the improvement of iron ore futures contract rules to make better use of the basic functions of prices discovery and risk management, further enhance the ability to serve steel industry chain and supply chain enterprises.
First, the iron ore futures market has played an active role in its operation, reflecting the relationship between supply and demand in the spot market. This year, the iron ore futures prices have fluctuated around the spot supply and demand factors, and this have maintained a high correlation with spot prices, playing the role of as “thermometer” in the spot market and in the industry. During the fluctuation, the futures price has been lower than the international market price and the domestic spot market price, the future price played the role of stabilizing the price in the market; in the first 11 months of the domestic futures market transactions, positions and capital scale increased significantly, the volume of iron ore futures transactions and holdings decreased year-on-year, and undisclosed funds entered the speculation status on a large scale.
Second, the Exchange continues to strengthen market supervision and optimize contract rules, with the goal of better staying close to and serving the spot market, rather than affecting price changes. In terms of market supervision, starting from resolutely preventing and controlling financial risks and safeguarding industrial interests, DCE has continued to strengthen the dynamic monitoring of the iron ore futures market operation this year, and implement measures in a timely manner from an early age, to increase transaction costs, prevent possible overheating of transactions through the implementation of trading limits, raising margin levels and procedures Fee standards, etc., and initiate a "five-in-one“ supervisory coordination mechanism to give full play to supervisory forces and severely crack down on violations of laws and regulations. In terms of contract rule optimization, DCE has continued to increase deliverable resources, increase delivery factories and warehouses, and study the implementation of dynamic premium and discount schemes. The purpose is to further improve the convenience of delivery, promote the integration of futures and cash, and make better use of price discovery. In addition to the basic functions of risk management, these measures will not change the spot supply and demand relationship, nor will they become a decisive factor in futures market price changes.
Third, the market has reached a consensus that the root cause of iron ore price fluctuations this year is fundamental factors and unbalanced industrial structure. The new trade price formation mechanism requires joint efforts from multiple parties. From the perspective of market analysis, changes in fundamental factors are the main reason for the price changes of iron ore this year. It is also deeply affected by the industrial pattern of concentrated sellers and scattered buyers of iron ore. Especially in the industrial competition pattern, buyers have a weak bargaining power that have not yet formed a joint force. To change the existing market structure and pricing mechanism, it is necessary for the futures industry to meet each other, form a joint force, improve the market balance mechanism, and establish a new trade price formation mechanism through the futures market. In this process, DCE should play an active role.
Dalian Commodity Exchange
December 20, 2020