China's first iron ore futures have debuted in heavy trade on the Dalian Commodity Exchange, suggesting strong appetite from steel mills and traders to hedge risk in the world's top consumer of the raw material.
Volume on the exchange for the most active May iron ore contract topped 200,000 lots in the first hour-and-a-half of trading, including both the buy and sell side.
The first physically delivered iron ore futures is China's latest attempt at boosting its power to price iron ore - the world's second-most traded commodity after oil - as a more volatile market exposes its steel mills to increased risk.
If the contract is able to generate sufficient liquidity, traders say it could become a benchmark for a 1-billion-tonne-plus seaborne iron ore market, where deals are currently based on index prices computed off a small portion of China's spot transactions.
"Today's opening and trading volume point to a good start for the new futures, and a lot of institutional and industry investors have shown strong interest in the tool," said Fu Yang, an analyst with Guotai Junan Futures in Shanghai.
China's big steelmakers Baosteel, Angang and privately owned Shagang, as well as domestic traders and institutions have all indicated their interest in the Dalian futures, industry sources said.
Volume traded reached 209,940 lots by late morning. By comparison, volume for the most-active contract for thermal coal reached 308,648 lots on its full first day of trading on China's Zhengzhou Commodity Exchange on September 26.
The most-active May contract opened at 978 yuan a tonne versus the base price set at 960 yuan, touching a high of 984 yuan. The base price of 960 yuan, stripping out value-added tax and other costs, is equivalent to about $US129 a tonne for imported 62-per cent grade iron ore cargo that includes freight cost, traders said.
The price compares to the current industry benchmark of $US134.40 a tonne for the same 62-per cent grade on Thursday, based on data from price provider Steel Index.
The Dalian futures could also pose a threat to the $US28 billion swaps market in the commodity by exploiting massive untapped hedging potential in China without the trading restrictions that have been a challenge for the global swaps market trying to tap Chinese flows.
Foreign companies can trade the Dalian futures through units that are registered in China, industry sources say.
China consumes more than 60 per cent of global seaborne iron ore and last year imported a record 744 million tonnes.
Chinese steelmakers currently purchase the raw material against prices provided by Platts, the Steel Index and Metal Bulletin which calculate daily prices based on spot transactions for imports mainly by China.
The Dalian contract is based on 62 per cent grade iron ore and provides the option for physical delivery. It has a lot size of 100 tonnes and trading margin is 5 per cent of the contract value.
China, also the world's largest steel producer and consumer, has the world's most liquid steel futures - rebar on the Shanghai Futures Exchange - which was launched in 2009 and is widely used by market participants for clues on the state of the country's steel industry.