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Premium Contracts, Appealing Instrument for Steel Makers and Iron Ore Producers

Premium contract is a flexible and functional tool especially for industries such as iron ore and steel that has long-term consumers and manufacturers; it can be used for different maturities, and the formula for determining the price of the final deal, prepayment and the type of the final transaction is customizable for optimization based on the needs of the parties to the transaction.
Premium Contracts, Appealing Instrument for Steel Makers and Iron Ore Producers

During the 5th International Conference on Iran Iron Ore, Hamed Soltaninejad, CEO of Iran Mercantile Exchange, outlined the IME’s capacities to boom Iran's iron ore trading and said that with the efforts made, iron ore, as a commodity that influences the Iranian economy, is set to be offered on IME’s domestic market for price discovery.

Growth of Iron Ore Transactions in Global Commodity Exchanges

Soltaninejad checked out iron ore transactions in world commodity exchanges, and said: "surveying iron ore price trend in the global market over the past 40 years shows that the price of this product has dropped out of a stable trend since about 2000 and has been faced by fluctuations.

Soltaninejad mentioned the Chicago Mercantile Exchange, Singapore Commodity Exchange and Dalian Commodity Exchange as the main commodity exchanges in the world that trade iron ore and said: "Iron ore futures contracts on the Dalian Stock Exchange has the second place among 40 best metal contracts for the year 2017 and the contract was ranked 22th on the Singapore Commodity Exchange, far beyond Dalian Commodity Exchange.

CEO of IME pointed to details of iron ore contracts in the Dalian Commodity Exchange said: "Iron ore futures contracts transactions has reach a significant level from 2 million contracts in 2013 to 342 million contracts in 2017, and the volume of trading in the year 2017 is equivalent to 34 billion tonnes of iron ore; the volume of the transaction was recorded in conditions where the total annual iron ore production was about 2.3 billion tonnes per year.

"The New York Commodity Exchange, as a subsidiary to the Chicago Mercantile Exchange, trades iron ore within two types of instruments including options and futures contracts, which in 2015 the trading volume for iron ore futures contracts exceeds 139 million contracts and the trading volume for options contracts reached 74 million contracts. In 2016, the trading volume of futures and options contracts for the iron ore reached 202 million and 72 million contracts, respectively, showing the growing use of derivative contracts in the commodity markets.

Iron ore in the Iran Mercantile Exchange

Soltaninejad referred the history of listing iron ore in the physical market and said: IME has so far been the dominant in trading iron ore in export ring; so that iron ore was listed in the export ring in June 2011 and was listed in the domestic ring in September 2017.

Premium Contract, a Practical Instrument

He added that premium contract is a contract by which price difference for a certain commodity is discovered in the physical market of IME and the parties to the contract shall oblige to trade it at a final price at a certain maturity. Premium is an amount or percentage that is added to or subtracted from the base price for calculation of the final price. The base price is a price which shall be announced at the time specified in the Offer Notice. The committed transaction at the determined maturity stated in the premium contract based on final price. By adding the premium and the base price, the final price is calculated based on which the final transaction shall be settled.

Soltaninejad expressed the benefits of premium contracts as possibility to enter long-term contracts based on the world reference prices, transparency in internal-external price difference discovery in an organized market, default risk hedging, getting ensured of payment and delivery of commodity in future and ensured quality enjoying a long-term contract.

According to CEO of IME, Premium contract is a flexible and functional tool especially for industries such as iron ore and steel that has long-term consumers and manufacturers; it can be used for different maturities, and the formula for determining the price of the final deal, prepayment and the type of the final transaction is customizable for optimization based on the needs of the parties to the transaction.

The Most Important Factors in Inappropriate Pricing of Iron Ore

Soltaninejad pointed to the lack of transparency in the iron ore market, the asymmetric and incomplete information on the market, and the existence of a decentralized market and the dispersion of supply and demand as the main factors of inappropriate and imbalance iron ore pricing, and said: In this regard, one of the suggested solutions is that the prices of the entire chain of products comply with the price of steel bars, which in this case, due to different and not in line with one another fluctuations in the chain of products in the world markets, pricing are inappropriate.

Disadvantages of Monopoly Market

Soltaninejad referred to the disadvantages of the market moving toward monopoly and stated that raising prices and earning unconventional profit, low quality products in uncompetitive space, the lack of efforts to produce new products, inflation with pressure on consumer and lack of price dynamics and the lack of correction of resource allocation are among the most important disadvantages of exclusive markets.

Strategies for Development of Iron Ore Market

He commented on the proposed solution to improve and develop the iron ore market and said: The proposed solution of the IME is to organize a centralized market for iron ore in the exchange, and price justification through the supply and demand mechanism. In this regard, the implementation of the parliamentary resolution in Article 37 of the Law on Removing Barriers to Competitive Production and its Note will be a good guideline.

Soltaninejad said: "With the help of this article of Law, the price of iron ore can be discovered based on the supply and demand process on IME. In this case, after three times supply and lack of demand, the products can be exported and this is a way to detect the surplus of the commodity in the country. As a result of the implementation of this article and the supply of iron ore in the domestic market of IME, the debate on the excess supply of iron ore will be resolved in the event of extinction and elimination of export duties for iron ore in which the surplus has been supplied internally.

Author: International Affairs and PR

ID: 50069889

Published on: Wednesday, May 9, 2018 18:00

Source: IME

View count: 16

Wednesday, November 14, 2018 12:11

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