Dalian exchange going global

Pedestrians walk past the buildings of the Dalian Commodity Exchange in Dalian, Liaoning province, May 30, 2013. [Photo/VCG]

Dalian Commodity Exchange is making preparations for the participation of foreign investors in iron ore futures trading, its chairman said on Wednesday in Dalian, Northeast China's Liaoning province.

"With the participation of overseas investors, we can form a more complete pricing system in the futures and spot markets, thus improving the iron ore pricing mechanism for international trade," said Li Zhengqiang, addressing the two-day 2017 China Iron Ore Conference which was held in the city.

The DCE launched China's first iron ore futures with physical delivery in October 2013. Since then, the trading volumes have kept increasing.

It has attracted 12,000 corporate clients to hedge their risks, using futures. In 2016, the DCE's iron ore futures trading volumes reached 342 million lots, accounting for 22 percent of its total volume, said Li.

"However, foreign investors are not permitted to participate in it directly," he said.

China is the world's biggest iron ore importer and consumer. Last year, China's import volumes and consumption volumes of iron ore reached 1.024 billion metric tons and 1.156 billion tons respectively.

"We need to enhance (our) influence on global iron ore pricing," Li added.

The DCE, which was established in 1993, is one of the three commodity exchanges in China. It mainly trades agricultural, chemical, energy and mineral products.

Its iron ore futures contract is the world's only one with physical delivery.

Frank Zhong, chief representative of the World Steel Association Beijing Office, said there might be a long wait-and-see period for overseas investors' active participation.

"Besides, the participation in international pricing is a double-edged sword. When the bargaining power is weak, it might lead to much higher prices," he commented.

Chen Baoxi, an analyst with Guofu Futures, said he believed such risks did exist but could not be a barrier.

"With international investors, the price formation mechanism will be improved. We need better preparation to avoid the risks," he added.

According to Chen Wei, director of the DCE's industrial products sector, the DCE has finished its plans for introducing overseas investors.

Only foreign institutional investors will be permitted to enter the market. In addition, they must participate in the trade through Chinese futures companies. They can use the US dollar and the renminbi to participate in the trade, Chen said.

The DCE has set up a bonded delivery warehouse for iron ore in Dalian's Free Trade Zone to make preparation for the foreign investors.

"With the introduction of foreign investors, the local iron ore futures market will become a part of the global market. The iron ore pricing will be more fair and transparent, leading to better development of the whole industry," Chen said.