New Option for Chinese Iron Ore Trade Pricing Model: Basis Pricing

On July 23rd, Rizhao Iron and Steel Group and Yongan Capital and CITIC Ryukyu Trading (Shanghai) Co., Ltd. signed the first single iron ore basis trade contract in Rizhao, Shandong. This trade contract uses the iron ore **1409 contract as the benchmark price, and sets a certain standard for rising postal water. The time limit agreed by both parties is within one month.

Basis pricing means that when buyers and sellers sign a purchase and sales contract, they are not sure of a fixed price. Instead, the base price of the designated exchange is used to lock the base price. The buyer selects the ** price at a certain point in time before shipment as the final transaction price. Basis trade is a relatively common form of trade in the international bulk raw material market. Domestically, nonferrous metals, soybeans and other industries have been widely used. The industry is also generally referred to as “point price”.

The current common use of iron ore in inter-Korean trade is index pricing. The biggest risk faced by steel mills is iron ore price fluctuations, because iron ore prices account for about 70% of the cost.

Reuters quoted Shi Chunsheng, deputy general manager of Yongan **, as saying:

Basis pricing is equivalent to steel mills and traders shifting the risk of price fluctuations to the ** market, while the ** market is relatively fair... This completes the pricing model for the ferrous metal industry chain, although it cannot replace the widely used price point, month, or month. Average price, index pricing and other methods.

Basis pricing uses ** market prices to fix spot trading prices, which can shift price fluctuations from the spot market to the ** market. According to the usual practices of the domestic non-ferrous metals market, traders usually establish hedging positions in the ** market after the ** contract is established, and then close the position when the goods are resold.

As a result, hedging may be achieved if the spot price fluctuations may cause losses to traders, and if the basis spread is in a favorable direction, the trader's hedging positions may also be profitable.

In addition, the pricing power of goods is transferred from the upper seller's one-piece pricing to the downstream buyer, so both buyers and sellers have the autonomy to participate in pricing. The Dalian Commodity Exchange press release pointed out that due to the fact that there is no authoritative price in the international ferrous metals field, the basis trade based on the price of iron ore ** in the Dalian Commodity Exchange will help improve China's pricing power in this area.

Considering that the participation of domestic iron ore ** is only for domestic enterprises, it is calculated and delivered using ***. Therefore, even if the basis pricing model is successfully implemented, it is unlikely to be promoted to the international iron ore trade in the short term.

Judging from the current domestic market, state-owned enterprises, which are the main players in the steel market, are also less likely to choose to base pricing.

Analysts believe that due to the decision-making process and other issues, the percentage of state-owned enterprises participating in the ** market is not high. This method is definitely an option (for mills and traders), but looking at the basis pricing model is not likely to become mainstream.