According to international experience, in modern market economy, the determination of the benchmark price of international trade usually depends on the futures market. A futures market with an international perspective can provide the real economy with a way to transfer market risk between domestic investors and foreign investors. At present, there are more than 10 kinds of iron ore derivatives in the international market, and the most influenced exchanges includes DCE, SGX and CME. The introduction of foreign traders will further strengthen the international influence of China's iron ore prices and gradually weaken the adverse effects of Prof's index.

First, the prices of foreign major iron ore derivatives are closely related to the Platts index, and deriving profits of iron ore importers. With the collapse of the international iron ore association pricing mechanism in 2010, the international iron ore derivatives market has developed rapidly. In addition to China, SGX and CME are also powerful markets. The iron ore derivatives of the two exchanges are in cash settlement with the international iron ore price index as reference. These iron ore price indices are highly correlated with Platts index, and the hedging scheme combined with them can almost hedge 100% of the price risk.

In addition, SGX and CME have a sound market structure, low fund use and transaction costs, and flexible market construction. In international trade, that iron ore importing countries sign the purchase contract with the Platts index, and hedge the risk with SGX and CME's iron ore futures is gradually becoming the mainstream. This has led to the increasing attraction of the international iron ore derivatives market to international customers, thus weakening Chinese competitive advantage of obtaining international pricing power from huge demand.

Second, due to the futures settlement price of DCE generating at 3:00 p.m. of each trading day, while Platts index is produced after 6:00 p.m., the price of Dalian iron ore futures gradually affected the formation of the Platts index. On the one hand, it improved the price of Platts index‘’ following by screw steel‘s’ "fast rising and slow falling". Before the listing of Dalian iron ore futures, when the price of screw steel rises, the Platts index usually followed the screw steel’s faster rise, and when the screw steel’s price falls, the Platts index fall lag, the longest lag time for up to 10 days. After the listing of Dalian iron ore futures, the two price indices can simultaneously rise or fall.

On the other hand, it improved the price of the Platts index following the screw steel‘s’ "increasing more but decreasing less". When the price of the screw steel fell, the proportion of the Platts index followed the fall of 62% before the listing of Dalian iron ore futures to 74% after the listing. The decline was increased from an average of 1.20% to 1.49%, and the proportion of the Platts index was reduced from 36% before the listing of Dalian iron ore futures to 23% after the listing, and the rise fell from an average of 1.39% to 0.99%. As a whole, after the Dalian iron ore futures market is listed, the fluctuation characteristics of the Platts index have changed the profit rate of the iron and steel industry in China by 7 percentage points after the futures contracts are listed.

Third, because market participants are confined to domestic customers, Chinese iron ore futures price has not been widely recognized by the international market. For a long time, there are few institutional investors and more retail investors in Chinese futures market, and the traders who participate in iron ore futures are all confined to the domestic market. Taking the iron ore market as an example, the total number of customers is about 500 thousand, of which there are only 1150 industrial customers and all of them are domestic enterprises, and the international mines are not involved. The structure of such traders cannot meet the demand of the real economy to diversify the risk around the world, and it also makes it difficult for Chinese iron ore futures market to form the price reflecting the global supply and demand relationship and limit its ability to serve the steel industry.

Copyright by FangQuant.com