Iron ore futures offer hedging tool, greater say in pricing

"Currently, domestic steel mills mainly hedge the risks of the iron ore trade by adjusting their purchasing and production strategies," said Li Daguang, deputy general manager of Ansteel International Trade Co.

"They buy more when the price is quite low and buy less and suspend production for overhaul of the blast furnaces when the price is high.

"But the iron ore futures platform at the Dalian Commodity Exchange will help steel companies lock in costs and control risks," he said. In addition, the renminbi-based pricing of the contract will help attract more domestic steel mills and traders.

The first day's trading volume exceeded 338,700 lots, including the buy and sell sides. The contract is for 100 metric tons per lot, the exchange said in a statement on its website.

Physically delivery will be accomplished with imported iron ore powder with 62 percent iron, or both refined iron ore powder and iron ore concentrates with an iron content above 60 percent as a substitute, the statement said.

Wang Guoqing, an analyst of iron ore futures, said that China, as the world's top iron importer and consumer, has great spot markets that can better support domestic steel makers.

Mills need to upgrade, especially as the steel sector is experiencing serious excess capacity.

"But the regulators should also use the tools in a cautious way to curb speculation and cool inflation," he added.

China is the second-largest producer, the biggest importer and the largest spot trading market for iron ore.

Last year, the nation produced 440 million metric tons of iron ore and imported 740 million tons.