Singapore's SGX punches above its iron ore weight
In the $US7 billion-a-day global iron ore futures market, size doesn’t matter when it comes to clout. Contracts in Singapore have greater pricing power than those traded in China even though the volumes in the city-state are more than 20 times smaller, according to Goldman Sachs.
Although investors may assume that it’s the Dalian Commodity Exchange, or DCE, that sets the global price given the high volumes, it’s the contract on the Singapore Exchange, or SGX, that drives the market, the bank said in a report. The reason may be that institutional investors account for a greater share of trade in Singapore, it said in the October 20 note.
Goldman’s analysis revealed that the SGX has more pricing power than the DCE, with daily changes in Singapore consistently leading daily changes in Dalian. Photo: Jacky Ghossein
While China’s policy makers have said they want to develop its raw material futures markets as hubs for setting prices – seeking to marry the country’s commercial heft with a greater say in determining how much commodities cost – Goldman’s finding suggests that goal remains a distant one. In iron ore, the country is the world’s largest buyer, accounting for more than two-thirds of the seaborne market. Most cargoes come from miners in Australia and Brazil.
“Size doesn’t matter,” analysts including Amber Cai wrote after crunching the numbers. The bank’s analysis revealed that the SGX has more pricing power than the DCE, with daily changes in Singapore consistently leading daily changes in Dalian, they wrote.
Iron ore futures in Dalian, which are priced in yuan and largely closed to offshore investors, have rallied 38 per cent this year. The contract drew global attention in March and April, when a retail investors’ frenzy in China spurred a surge in raw materials prices and volumes that was then quelled by regulators. SGX iron ore futures, which are priced in dollars, are 39 per cent higher, while spot prices from Metal Bulletin Ltd. have risen 35 per cent.
After Chinese investors dived into commodities earlier this year as signs emerged of improving demand, Australia’s Fortescue Metals Group flagged the level of speculative trading was unhealthy. The benchmark iron price was being controlled by the futures market and by speculation in Dalian, Lourenco Goncalves, head of Cleveland-based Cliffs Natural Resources said in March.
“While DCE’s influence pales relative to SGX overall, it tends to increase when iron ore prices stabilise or rise after sharp falls,” Goldman said, estimating individuals account for 70 per cent of Dalian volumes. “This may also be related to the stronger speculative motives observed among many onshore investors.”