INTERVIEW-Dalian bourse eyes launch of iron ore futures soon

Thu May 9, 2013 5:24am BST

* Contract will be world's first with physical delivery

* Bourse looking at 100-tonne lot size, six delivery points

By Manolo Serapio Jr

SINGAPORE, May 9 (Reuters) - China's Dalian Commodity Exchange plans to launch the world's first iron ore futures contract backed by physical delivery "as soon as possible", a senior official said, hoping to tap demand for hedging tools amid increased price volatility.

Iron ore futures contracts offered by exchanges in Singapore and the United States are settled in cash, and Dalian's physical delivery-backed contract may draw more iron ore consumers managing risks as top importer China tries to gain the upper hand in setting the price benchmark for its biggest import commodity by volume.

"We are working hard to launch the iron ore futures contract as soon as possible," Chen Wei, head of industrial products at the Dalian exchange, told Reuters on the sidelines of an industry conference on Thursday.

With contracts backed by physical delivery, buyers hedge positions and secure supplies, while cash-settled contracts are more open to speculative trading activity, which China tries to curtail.

"You can just throw out cash contracts even before the expiry. You can also do that with contracts with physical delivery, but less so because it puts the buyer at risk supply wise," said a manager at a Singapore bank trading iron ore swaps.

"I think the Dalian futures will be a game changer, because it has a physical component and more importantly it's coming from China."

Each contract will be 100 tonnes of 62-percent grade iron ore, said Chen. The exchange is looking at Tianjin, Qingdao, Lianyungang, Tangshan, Dalian and Rizhao as delivery points, he said.

The yuan-priced contract will be open to foreign companies with subsidiaries in China, he said.

The China Securities Regulatory Commission approved the plan in October and Chen said the bourse is now awaiting the go-ahead from related ministries.

A Dalian exchange official told Reuters last month the exchange hoped to launch the contract this year. .

China, which buys about two-thirds of the world's 1-billion-tonne plus iron ore a year, has been trying to wrestle pricing power away from the global miners since the evolution of contract pricing from annual to spot-based in recent years.

The Shanghai Futures Exchange is also looking at offering cash-settled iron ore futures.

China set up its first physical trading platform a year ago in a bid to help determine price benchmarks currently dominated by foreign data providers such as Platts that calculate them based on collected spot transactions, mostly in China.

China's top economic planning agency in March accused the world's top three miners and some traders of manipulating the market to push up prices that soared more than 80 percent to near $160 a tonne .IO62-CNI=SI in February from three-year lows in September.

The Singapore Exchange launched its iron ore futures contract last month in a move to attract and retain U.S. market participants faced with tougher rules in trading over-the-counter derivatives such as swaps.

CME Group, the largest operator of U.S. futures exchanges, will list its iron ore futures contracts on its electronic platform from May, hoping to boost liquidity in a derivatives market dominated by the Singapore Exchange.

SGX clears over 90 percent of globally traded iron ore swaps with volume hitting a record 109 million tonnes in 2012.

The Dalian exchange began trading the world's first coking coal futures contract in March and the world's first metallurgical coke futures in 2011.

(Editing by Richard Pullin)

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