China Approves Iron Ore and Thermal Coal Swap Deals

The new contracts provide its participants with new financial tools to overcome the risk of volatile prices. China is the top consumer of iron ore and coal in the world. These contracts are the part of country’s efforts to gain influence over the benchmark pricing of a key commodity.

 

The new swap deals will be priced in the Yuan and trade over the counter and the Shanghai Clearing House will handle the clearance. However, this will make bad impacts to the cash-settled iron ore and thermal coal swaps deals cleared by the Singapore Exchange and CME Group.

 

The deal for iron ore which has 62 pct content will be priced against the combinations of reference indices given by the information providers, China Beijing International Mining Exchange, CUSteel and Mysteel.  The deal for thermal coal will be in the terms of government-backed Bohai-Bay Rim Steam Coal index. One source said that the two contracts would be launched soon and would be rolled out at the same time.

 

A swap contract is a cash-settled derivative between a seller and a buyer at a fixed price for a set amount of time, providing price certainty for both parties on the underlying commodity.

 

As mentioned, China is top consumer and it consumers about 60 pct of the seaborne iron ore in the world. Last year, the country has imported about 820 million tonnes, which is a record figure and it is many times greater than the volume of iron ore swaps cleared by the Singapore Exchange. This highlights the great hedging opportunities in China.