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Turbulent iron ore market calls for steel futures
Last Updated(Beijing Time):2005-11-23 11:06

By Yu Ke

Under the current situation, the debut of the transaction of steel futures at the earliest convenience will be able to evade the risk brought by the fluctuation of steel price and promote the steady and healthy development of the steel industry.
 
Besides its large production and consumption of steel, China is also an important iron ore importer. In 2004, China's importation of iron ore was 208 million tons, up by 40.49 percent year on year. In the first three quarters of 2005, the importation of iron ore has achieved 198 million tons, accounting for around one thirds of the international iron ore trade market, which means that China is about to exceed Japan to be the biggest iron ore importer.

Meanwhile, the international iron ore price has been keeping rising from US$ 32.79 per ton in 2003 to US$ 61.1 per ton in 2004 with a growth rate reaching 86.34 percent; the price went up again by 71.5 percent in February 2005. At present, the three international iron ore giants are shouting that iron ore price should be further increased in the next year when a new round of price negotiation is on the point of start. The ever-rising price of iron ore will inevitably affect the steel price and profit of steel enterprises in China.
 
Therefore, the fluctuation of iron ore price requires the correspondent futures market to evade risks. In the absence of iron ore futures, the transaction of the already matured steel futures can be considered to make its debut. By doing so, domestic steel production enterprises and consumption enterprises can be provided with a tool to evade price risk on one hand; and on the other hand, the change of upstream steel product prices can be steered through futures price that is capable of fully reflecting the relations between supply and demand, thus obtaining international discourse power in the pricing of iron ore, holding sufficient information in trade negotiation and winning initiative to promote the healthy development of China's steel industry. 
 
In recent years, along with the recovery of global economy and a hike in oil price, the international steel price has also experienced soaring and plunging. Steel futures, being able to not only offer hedge function but to influence the winds of international steel price, has drawn a lot of attractions from various countries. In March 2004, the Multi Commodity Exchange of India introduced the first steel futures contract that took place in the Exchange. In October 2005, Japan took the lead in the transaction of the first steel scrap futures contract in the world. London Metal Exchange (LME), the world's biggest metal futures market, has also embarked on the development of steel futures that has been lain on the table for two years, and its announcement made on October 28, 2005 that it would embark on the development of financial tools aiming to manage risks in steel industry with steel price index as the breaching point has received world-wide attentions.  

The reasons that LME has strengthens its development of steel futures are not only the huge market demands, and a deeper reason is that it hopes to influence the trend of world steel market through launching its steel futures, thus becoming the pricing center in the world steel market.

As for China, at the present critical moment for the developing prospects of its steel industry, steel futures should be resorted to avoid price risks, thus enabling enterprises to maintain stable production and operation, have their costs and profits locked and reduce the possibility of loss resulted from price fluctuation, thus making for the realization of a steady growing profit rate by steel enterprises.

More importantly, steel futures is beneficial to the structural adjustment of the steel industry as well as the change of the current stage that the industry characterized by repeated construction, excess capacity, low quality and low concentration. Production enterprises can be leaded to improve their techniques and quality by launching steel futures transaction in convenient time, selecting appropriate varieties as their contract objects and choosing famous brand products of big-and-medium-sized state-owned enterprises for delivery, so that to comply with the standard of deliverable grades determined by the exchanges, which is favorable to the improvement of the quality of China's steel products objectively. These measures are helpful to implement the total amount control of "closing down small ones, eliminating inferior ones and limiting long-term ones", restrict the low quality wire production of small steel factories and optimize the structure of the steel industry, thus serving for the country's industrial policies.

The establishment of competitive and orderly steel market order is not only of extreme importance to the stability of steel prices and the guarantee of the healthy development of the steel industry, but of great significance to the steady and healthy development of the national economy. The current situation of the circulation order of steel industry has not only disturbed the normal formation of steel prices, but also brought negative impact on the development of steel enterprises as well as steel industry.

Anyway, facing the fact that there is an intense contention on the international pricing right of iron ore and steel among various countries in the world, and under the urgent requirements of China's steel industry to conduct a structure regulation, improve the circulation system and ensure the steady and healthy development of steel enterprises, steel futures thus should be introduced in time to provide vast steel production enterprises and consumption enterprises with effective hedge measures, and commit its due contribution to the acquisition of the pricing right worldwide and the guarantee of the country's economic security.

Source:CE.cn 
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