China launches physical iron ore trading platform

China, which is currently the world's largest iron ore consumer, launched its physical iron ore trading platform on Monday, Jan 16, 2012. This move by the country is in a bid to strengthen its pricing power over iron ore, which has been dominated by big players. The best thing about the new trading platform is that it will not include derivatives such as swaps and futures, which would have lead to price speculation.

On this launch, China said that said large scale iron ore consumption has entitled the country to come up with such a trading platform, on the expectation that the prices will reflect the actual supply and demand and eliminate the effects of speculation and manipulation. 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", according to Mr. Wang of the China Iron & Steel Association (CISA).

Currently, iron ore prices are fixed between steel companies and iron ore suppliers on a 3-month contract basis, and not on the basis of the market forces, i.e. on the basis of demand and supply. This is where the Chinese steel companies faced problems with their iron ore suppliers, with the rising prices affecting the margins of the steel players.

Although iron ore is produced by almost 50 countries in all, six countries — Brazil, Australia, China, India, Ukraine and Russia — account for almost 82% of the world's total production.

We believe that this iron ore trading platform launched by China will provide more transparency on iron ore prices domestically and internationally. Due to volume problems, iron ore prices do not have well-organised benchmarks or indices. China is the one of the largest iron ore consuming nations, and the online platform will receive a lot of participation from various dealers, domestically and from other foreign countries. "This platform is currently only at the launch stage, and we already have domestic and foreign steel firms expressing interest", Wang has said to the media.

Indian iron ore prices are currently laid down by the state-run company, NMDC, which holds a large part of the iron ore mines and supplies ore to the Indian steel players. We believe that the platform will offer the real value of iron ore prices, which can also be taken as the benchmark price for fixing prices in India. In the last one year, iron ore prices have gone up substantially, and the physical trading platform will benefit the steel companies which were feeling the pressure of high input costs of  coking  coal and iron ore.

As of now, the index is in its initial launch phase, and will take some time to mature in terms of volume and volatility. With the passage of time, we believe that it will provide better pricing as compared to that provided by the currently available methods.