Recently, Vale metals (Shanghai) Co., Ltd. (hereinafter referred to as "vale") and Shandong Laigang Yongfeng Steel Trading Co., Ltd. (hereinafter referred to as "Laigang Yongfeng") signed a basis trade contract based on the iron ore futures price of dashangsuo. Market participants said that this marked that the world's largest iron ore producer began to use China's iron ore futures price as a reference for trade pricing, and it was also the first time for overseas mines to use futures price to carry out basis trade, which is a milestone in promoting basis trade, optimizing pricing mechanism and improving China's price influence in the global iron ore market. It is reported that the basis trade contract between vale and Laigang Yongfeng takes "futures price + basis" as the settlement price, the minerals are set as Brazilian mixed powder (BRBF), and the delivery place is Qianwan port, Qingdao. The two sides take the 2005 iron ore futures contract as the price benchmark, and determine the basis by referring to the domestic spot price difference and other factors. This time, the two sides adopted a typical seller bidding mode, Vale as the seller exercised the right of price point, and Laigang Yongfeng as the buyer locked the procurement cost by hedging in the futures market.

For overseas mines, the basis trade can be used to mark the price in RMB and sell the port spot based on the futures price without directly participating in the futures market, which is conducive to hedging the risk of price fluctuation and consolidating the trade relationship with downstream Chinese customers. "Basis trade is flexible and provides buyers and sellers with tools to manage price risk. With the increasing popularity of port trade and RMB pricing mode, the basis trade mode can enrich the spot trade pricing mode. " Vale said.

In fact, since 2015, Vale has tried to mix ore production and RMB spot sales in Chinese ports to further close to the Chinese market and meet the needs of end customers. In 2018, Vale sold 18 million tons of iron ore denominated in RMB. The use of futures price as a reference for spot sales is the first time that the world's largest iron ore producer uses China's iron ore futures price as a reference for trade pricing. It is also a new attempt of derivative pricing mode for overseas mines after long-term cooperative pricing and index pricing mode.

For domestic steel mills, through basis trade, they can get goods ahead of time and price flexibly to lock in costs and profits. Compared with the absolute price change, the fluctuation range of the basis is smaller, and carrying out the basis trade is conducive to reduce the transaction risk of steel enterprises. "Compared with the traditional long-term cooperation and Platts index pricing models, the pricing cycle of basis trade model is more flexible. Enterprises can choose the pricing cycle that meets their own needs, instead of the traditional long-term cooperation and index pricing model, which limits the cycle to a certain period of time. At the same time, the futures market provides an open, transparent and real-time price signal, which allows enterprises to dynamically manage transactions and inventories according to market changes, greatly reducing the risk of default. " Li Chao, general manager of Laigang Yongfeng, said.

According to relevant market participants, the price of iron ore futures is formed by a large number of industrial enterprises and investors through open trading, and the price formation mechanism is more open, transparent and fair, reflecting the supply and demand pattern of iron ore. In particular, after the internationalization of iron ore futures last year, it has been highly concerned by the overseas market, with overseas customers in 15 countries and regions, including Australia and Japan. Through the internationalization of iron ore futures, a representative global iron ore price benchmark denominated in RMB will be formed in China in the future, which will make China's buyer voice in the international market, enhance the international influence of China's price, and promote China's iron and steel industry to change from a passive price receiver to a price setting participant. In addition, with more domestic and foreign enterprises adopting the basis trade mode based on China's futures price, the proportion of RMB settlement and payment in the future international trade is expected to further improve, so as to promote the futures market to better serve the RMB internationalization. (From LGMI)