China plans to launch iron ore options in 2019

27 September 2018

China aims to launch iron ore options next year, a source with direct knowledge of the matter said, as the world’s top buyer of the steelmaking raw material looks to offer more hedging tools to iron ore producers and steelmakers.

China’s plan follows the opening of its iron ore futures to foreign investors in May, and would challenge iron ore options in Singapore, where the bulk of global trades is concentrated, as well as in New York.

It would follow China’s launch of sugar and soymeal options last year and copper options which debuted just last week.

“The Dalian Commodity Exchange is still working on preparations for the iron ore options. But it won’t take too long and could be launched by the end of 2019 at the latest,” the source told Reuters, declining to be identified as the plan has not been approved by market regulators.

The Dalian Commodity Exchange and the China Securities Regulatory Commission did not immediately respond to faxed requests for comment.

As a hedging tool, options would allow iron ore traders, miners and steel mills to manage price exposure, giving the buyer the right - but no obligation - to assume a futures position at a specified price.

The ability to carry out hedging trades could encourage more primary users to take part in the iron ore futures market, which traders say has been dominated by speculative investors who have deserted the market recently amid stagnant prices.

Iron ore options are mainly traded on the Singapore Exchange, with 1.77 million contracts, equal to 176.8 million tonnes, traded in January to August, exchange data showed. New York-based CME Group Inc also offers iron ore options.

The Dalian Commodity Exchange (DCE) allowed foreign investors to directly trade iron ore futures for the first time in May, hoping the most liquid iron ore derivative in the world would benefit from more institutional investors.

It was the second commodity that China opened to outside investors after the launch of crude oil futures in March.

But open contracts held by investors in Dalian iron ore futures fell to a 3-1/2-year low on Tuesday, to 822,452 lots, and trading volumes nearly halved in August from May, which traders say shows that the bulk of the market remains in the hands of local speculators.

The source said he did not expect Chinese regulators to delay approval of DCE’s iron ore options, as offering existing participants a new tool would have less risk than opening the futures market to overseas investors.