Metals News
UPDATE 2-China Launches First Physical Iron Ore Trading Platform
industry news

* Domestic steel mills already joined new platform

* Financial institutions, derivatives not allowed

* China "hopes" foreign miners will participate at later stage (Adds analyst quotes)

By David Stanway

BEIJING, Jan 16 (Reuters) - China launched its first physical iron ore trading platform on Monday in the latest move by the world's biggest iron ore consumer to strengthen its pricing power over a raw material long dominated by giant foreign suppliers.

The China Beijing International Mining Exchange (CBMX) launched the online platform together with the China Iron & Steel Association (CISA) and the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters.

CBMX also launched a new index based on completed transactions rather than offer prices, and said the system would better reflect actual supply and demand and eliminate the effects of speculation and manipulation.

China has long believed that its position as the world's biggest iron ore consumer entitles it to a bigger say on prices, and the new platform is its latest move to wrest control from the big three global miners, Vale, BHP Billiton and Rio Tinto , which between them control three quarters of global seaborne ore supplies.

"Monopoly practices and price manipulations have a massive impact on current iron ore prices and have also inflicted fatal harm on Chinese steel enterprises," said Wang Xiaoqi, deputy chairman of CISA.

"We feel it is necessary to set up this platform in China because about 60-70 percent of our iron ore is imported and 100 percent of the spot market volumes are in China -- putting it in China is the most rational," he told reporters.

The platform will also attempt to provide a domestic rival to the GlobalOre trading exchange backed by mining giant BHP Billiton and based in Singapore.

"Currently, (domestic) steel companies are willing to establish contact with the GlobalOre platform -- this is not a problem, but as we are still developing our own platform we have requested them not to sign any contracts yet," Wang said.

Unlike rivals, trade in iron ore derivatives such as swaps and futures will not be permitted in order to "better reflect the price based on actual supply and demand", he said.

The exchange earlier said banks and financial organizations would not be allowed to participate in a bid to stem speculation.

China's major steel mills -- Baosteel, Hebei Steel, Wuhan Steel, Shougang and Angang -- as well as large iron ore traders including China Minmetals and Sinosteel have already agreed to become sponsor members of the platform.

However, none of the major foreign iron ore suppliers have yet become members, Wang said.

"We welcome them to take part -- this is a global, open platform," he said. "This platform is currently only at the launch stage, and we already have domestic and foreign steel firms starting to express interest."

Traders were sceptical about the new platform, saying that unless China offers incentives like rebates on value-added tax, they were unlikely to move away from systems now in use.

Global miners normally email prospective buyers whenever they are selling cargoes via tenders in the spot market, a system deemed efficient and free of brokering fees.

"Whether it will replace the current system to become a centralised platform, I don't see that happening because the current system works fine," said a physical iron ore trader in Singapore.


China's struggling steel sector imported a record 686 million tonnes of iron ore last year, up 10.9 percent from 2010, and prices during the first 11 months of 2011 were nearly $40 higher than the previous year's average.

CISA has blamed the foreign "monopoly" miners for the surge in costs. It has also sought to resist the growing use of index pricing and what it calls the "financialisation" of the iron ore sector, favouring a return to more long-term contract pricing.

In May 2009, a number of large private traders set up China's first non-official iron ore trading platform in the port city of Rizhao and also planned to publish the country's first iron ore index.

But CISA soon shut the centre down, saying it would introduce speculation and destabilise the "benchmark" mechanism then used to set annual iron ore contract prices through negotiations between major buyers and suppliers.

Vale, BHP Billiton and Rio Tinto angered China by ditching the benchmark in 2010, switching instead to an index-based system in which contract prices are adjusted every three months.

While CISA finally ended its resistance to the new quarterly system last year, it remains suspicious, saying foreign indexes do not reflect the true state of the market.

CISA set up its own homegrown index last year, but it has struggled to establish itself in the face of more established gauges compiled by Platts, Metal Bulletin and The Steel Index.

Wang said there was no conflict between CISA's own index and the one launched by CBMX.

"In the future, CISA's price index will further improve by compiling the prices and information from this platform," he said.

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