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Commodities

China seeks alternative benchmark for iron ore

Others see Singapore Exchange as fair pricing platform

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Overproduction of steel persists as a serious problem in China.   © Reuters

TOKYO -- As the global steel industry grapples with mercurial prices for iron ore, a Chinese industry group has called for a new pricing benchmark that better reflects its home market.

Wang Liqun of the China Iron and Steel Association criticized the volatility of iron ore spot market prices at the Singapore Iron Ore Forum held in late April. Questioning the existing system, he called for a more transparent alternative.

Spot trading of iron ore lacks a uniform market like a stock exchange, so price data released daily by research companies serves as the market benchmark. The data is collected from such businesses as mining concerns, steelmakers and iron ore traders. British oil information company S&P Global Platts publishes the two most widely used indexes.

But many in China complain that the data compiled Platts inadequately reflects actual supply-demand conditions in the country. As a result, groups representing such sectors as steel calculate and publish their own data on iron ore prices.

China is deeply involved by virtue of its overwhelming presence in the iron ore market, where it accounts for more than 70% of the 1.6 billion tons in global demand. The country imported a record volume of more than 1 billion tons in 2016.

Wang stressed that an alternative market indicator can be selected from among existing ones, including from China, or set based on successful bids in open bidding, underscoring the country's unstated desire for greater control over pricing of steelmaking materials.

But a source at an Asian financial institution said that with the market under the heavy hand of the government, prices published in China are not very credible.

Futures trading is drawing notice as a means of hedging against swings in spot market prices. The market for futures contracts has come to exceed the spot market in size and is starting to serve as the benchmark, as with crude oil.

The Singapore Exchange is solidifying its position as a venue for fair price formation. Turnover of iron ore futures grew six times from 2014 levels to 1.2 billion tons last year.

In scale, this still lags behind China's Dalian Commodity Exchange. But the SGX is said to reflect real demand more accurately because it serves many actual consumers of the commodity seeking to hedge, according to an official at a trading house.

Increased trading on the SGX is in line with the Singaporean government's growth strategy.

More than 140 metal-related concerns already have teams for trading the commodity on the SGX, along with such resource majors as BHP Billiton.

Steelmakers have been entering the fray to mitigate risks of materials price fluctuations, said S. Iswaran, Singapore's minister for trade and industry. BHP is encouraging customers to trade futures by touting the benefits.

The SGX is also a growing presence in the market for coking coal, another material used in steelmaking. Since price volatility increased last year on such factors as Chinese production adjustments, steel mills in China and India have begun futures trading on the SGX.

(Nikkei)

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