In Global Iron Ore, Singapore Bosses China in Setting Prices (1)

(Bloomberg) -- In the $7 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 Group Inc.

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 Oct. 20 note.

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.

Retail Frenzy

Iron ore futures in Dalian, which are priced in yuan and largely closed to offshore investors, have rallied 36 percent 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 37 percent higher, while spot prices from Metal Bulletin Ltd. have risen 35 percent.

“While DCE’s influence pales relative to SGX overall, it tends to increase when iron ore prices stabilize or rise after sharp falls,” Goldman said, estimating individuals account for 70 percent of Dalian volumes. “This may also be related to the stronger speculative motives observed among many onshore investors.”

After Chinese investors dived into commodity futures earlier this year as signs emerged of improving demand, Australian miner Fortescue Metals Group Ltd. flagged that the level of speculative trading was unhealthy. The benchmark iron ore price was being controlled by the futures market and by speculation on the Dalian exchange, Lourenco Goncalves, head of Cleveland-based Cliffs Natural Resources Inc. said in March.

(Updates prices in fifth paragraph, miner comments in final.)

To contact the reporter on this story: Jasmine Ng in Singapore at jng299@bloomberg.net. To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net, Jake Lloyd-Smith, James Poole

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