Brazil's vale, the world's largest iron ore producer, has signed two differential trade contracts based on iron ore futures prices on the dalian Commodity Exchange with some of China's biggest steelmakers, including yongfeng international trade of shandong laigang.

This is a new pricing model after the long agreement price and platts index pricing model. Industry insiders believe that as Rio tinto, fortescue and other foreign mines have started to sell iron ore in renminbi, the past situation of international iron ore trade using platts index as the pricing basis and us dollar as the settlement currency is expected to change.

Refer to "China price" for international iron ore trade

Vale's base-trade contracts with domestic steelmakers show the two sides using the 2005 dayang iron ore futures contract as the price benchmark, with the ore set as Brazilian blended powder (BRBF). This marks the world's largest iron ore producer trying to use China's iron ore futures price as a reference for trade pricing, will become a classic case of the combination of the international iron ore market.

Li chao, general manager of yongfeng international trade, told reporters that the basis trade mode between vale and yongfeng international trade is a typical seller's bidding mode. The two sides take "futures price + basis" as the settlement price, and vale, as the seller, completes the point price several times in the point price period. The two sides have fully combined the spot selling price of vale and the purchase demand of yongfeng international trade to determine the point price of iron ore futures 2005 contract and the base price difference with reference to domestic spot price difference.

Vale is not alone in using renminbi and futures to price foreign mines in international iron ore trade. It is learned that Rio tinto and fortescue also set up a China trading company this year to carry out spot trade denominated in RMB in Chinese ports, whose price refers to spot and futures prices of ports.

"In the future, is engaged in the iron ore export foreign mines, iron and steel production enterprises engaged in iron ore imports, and is engaged in the iron ore port of international trade, from the original is given priority to with index pricing mode gradually convert to dalian futures futures pricing model for the benchmark iron ore, iron ore in the future yuan-denominated business proportion will gradually increase." Jianxin futures black research director zhai hepan said.

Preliminary estimates suggest that international trade in the steel industry could reach rmb1,000bn a year. "With the development of the internationalization of dalian iron ore futures, the renminbi-denominated dalian iron ore futures will become an important financial pricing tool in the future global iron ore trade, and the futures tool will become one of the main driving forces for the internationalization of RMB." State investment an letter futures researcher a senior analyst said.

Fundamental trade prevail to help the market multi-win

Since the introduction of foreign traders in May last year, China's iron ore futures in the international market has become increasingly prominent. As of the end of October, more than 110 foreign customers from 15 countries and regions including Singapore and Australia have participated in iron ore futures trading.

At the same time, domestic steel enterprises are also constantly exploring the combination of traditional trade and derivatives, innovation and improvement of iron ore trade model. Wang chao, deputy general manager of gaoyi iron and steel, told reporters that "iron ore futures + basis" pricing has become popular in domestic spot iron ore trading. In addition, this year, dayang took the opportunity to set up a base trading platform, which is also conducive to the promotion of base trading in the iron and steel industry chain.

In the eyes of market participants, the RMB pricing model of iron ore is in line with upstream and downstream interests. Researcher at the institute of guotai junan futures industry service Ma Liang told reporters that in recent years, overseas mines such as vale would mix ore and sales to the port in China, largely overcome because of the uncertainty risk brought by the long time span, port landing directly after mixed ore sales in our country, using the yuan price way is more effective and convenient, also is advantageous to the development and maintenance of the Chinese corporate clients.

Guosen futures is a service provider for vale to carry out base trade. Yu xiaodong, general manager of guosen futures, said that the base difference mode is flexible and diverse, and the price and delivery date can be negotiated and selected, which is conducive to both parties to carry out business in combination with their own characteristics and achieve win-win cooperation. "For the upstream mines, in the long run, the basis trade helps them lock in reasonable production profits and expand sales channels. For downstream steel mills, the development of base trade can lock resources in advance, optimize inventory management and procurement process, to achieve cost reduction and efficiency.

As the world's largest iron ore buyer, Chinese steel companies are the direct beneficiaries of the pricing of iron ore in renminbi. To this, wang chao that: "shanxi Gao Yi steel corporation and Rio tinto reached RMB denominated in 170000 tons of iron ore trade, is the goods customs clearance on the day of the port spot yuan price as the final settlement price, purchasing quantity is decided by the buyer, along with it to buy, very convenient, also reduced the currency risk is priced in dollars." (From LGMI)