China's DCE set to launch steel scrap futures

After several years' work, China's Dalian Commodity Exchange (DCE) is close to the final stage of introducing steel scrap futures, Yang Shuai, the exchange's senior executive manager told delegates attending China's National Steel Scrap Conference in Chengdu, Southwest China's Sichuan on February 23.

The underlying asset best suited for derivatives trading and the one central to the DCE's planning is shredded scrap, Yang told the over 1,000 delegates attending this year's annual conference, co-organized by China's Association of Metal scrap Utilization and Mysteel.

"The number of end-of-life vehicles nationwide is approaching a peak, and processing those vehicles will provide abundant shredded scrap materials to the (steel) industry," Yang explained.

As currently envisaged by the Dalian exchange, the lot size for the planned steel scrap futures contract is 30 tonnes, the minimum price variation unit Yuan 1/tonne ($0.15/t), the daily price volatility cap is at 4%, and the lowest margin at 5% of the contract value, Yang explained.

In addition, the last trading day and last delivery day of the mature contract will be the last but fourth day of the prompt month and the last but the third working day of the same month respectively, he told delegates, adding that for physical delivery, the minimum volume is also designated at 30 tonnes.

Meanwhile, in order to encourage the active participation of traders and producers in its futures contract, DCE has decided to locate its base warehouse for delivery in Jiangsu province in East China, one of the country's top scrap-consuming regions hosting major steelmakers such as Shagang Group.

At the same time, delivery warehouses will also be established in another 16 provinces across China, Yang said, adding that all 17 provinces account for over 80% of the country's total scrap supply.

China's scrap market has been witnessing severe price volatility over the past few years so the launch of a steel scrap futures contract will provide a hedging tool for both steelmakers and traders to manage their pricing risks, Yang observed.

DCE long ago embraced steel scrap as a commodity with potential for a futures listing, following the exchange's launch of iron ore futures in 2013, Mysteel Global notes. Though industry media have frequently reported that a launch was close, this year the odds seem at last to be strong.

"Actually, a scrap futures contract is highly likely to be launched within the first half of this year," a market insider close to DCE toldMysteel Global on the conference sidelines.

Written by Lindsey Liu, liulingxian@mysteel.com

Note: This article has been published under an article exchange agreement between Mysteel Global and SteelMint.