Brazilian miner Vale SA has signed a physical iron ore spot deal to supply a Chinese steel firm using the Dalian Commodity Exchange (DCE) iron ore price, the bourse said in a statement.
The deal comes as China aims to play a more muscular role in pricing for the steel-making ingredient, as well as in global derivatives markets, and is the first time an international miner has used a Chinese mainland iron ore futures price for a spot physical trade.
Under terms of the deal, known as a ‘basis trading’ contract, Shandong-based Yongfeng Group will buy Vale’s Brazilian Blend iron ore fines (BRBF) with settlement based on prices of iron ore futures on DCE for May 2020 delivery and a premium/discount, DCE said in a statement.
“Compared with traditional pricing models like long-term agreements and Platts benchmark, the pricing cycle for basis trading is more flexible,” the DCE statement cited Yongfeng general manager Li Chao as saying about using the futures price and premium/discount model.
With transparent and real-time price signals from futures markets, companies can significantly reduce default risks, Li was quoted as saying.
Vale did not comment when contacted by Reuters, while Yongfeng did not immediately respond to email requesting comments.
The Brazilian firm will deliver the minerals at Qingdao Qianwan port, according to the bourse. DCE did not disclose when the delivery will take place, nor what volumes had been agreed between the two parties.
“Basis trading can also help steelmakers to avoid exchange rate risks which usually come with Platts benchmark as it is dollar-denominated,” said Zhuo Guiqiu, analyst with Jinrui Futures. “But basis trading is calculated in renminbi, which can save the trouble for Chinese firms and hedge risks,” Zhuo said.
S&P Global Platts did not immediately respond to a request for comment.
China, the world’s biggest iron ore consumer with more than 1 billion tonnes purchased in 2018, has been trying to strengthen its influence on pricing for the steelmaking ingredient.
The most-active iron ore futures contract on the Dalian exchange has surged 58% this year, hurt by disrupted shipments from big miners, largely compressing profits at steel mills.
The country’s second-largest steelmaker, HBIS Group, last year signed a basis trading framework agreement with Cargill for 2 million tonnes of iron ore.