China’s iron ore exchange – watch out physical market

There was one pricing option I didn’t discuss that is viable, especially for manganese and chrome ores. Until now, all ore price discussions were between the principals, i.e., buyers (smelters) and suppliers (either miners or merchants).

Then the world changed when the Dalian Commodity Exchange (DCE) in China began trading iron ore. Until then, no one thought of commodity exchanges for ores were viable since there were different grades with different specifications. That are metal exchanges like the LME which trades copper, aluminum, and zinc. Also, the ore price for those metals are based on the metal price. However, it is impossible to base iron ore prices on steel.

The Chinese being the Chinese seized on this opportunity with a completely new exchange in Dalian; obviously China is the LARGEST buyer of iron ore and you can say that about manganese and chrome ore too.

In no time, the volumes traded on the exchange swamped the physical market and the exchange is now considered to be a significant price marker. Also, it allows speculators to add liquidity to the market.

Below are the details on the Dalian iron ore contract.

It’s a new world out there.

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