A halving in the price of iron ore this year has been fueled in part by Chinese speculators who built up huge short positions on the one-year-old futures contract on the Dalian exchange, in the process giving China the pricing power it has long craved.
As the largest consumer of many commodities from iron ore to gold, China has pushed hard to have a bigger say in pricing. Analysts say its clout on iron ore could become even greater if, as proposed, it lets foreigners including the big producers trade in the Dalian futures.
The contract, launched in October 2013, gave many Chinese investors their first real chance to play in the iron ore futures market, especially as Beijing has kept a tight rein on overseas derivatives trading by state-owned firms since some lost billions of dollars in offshore futures in the global financial crisis from 2008.
A sharp fall and big volume in Dalian futures, the world's first iron ore futures contract backed by physical delivery, helped drag down global spot prices as well as derivatives on other exchanges as sentiment soured in a market hit by a big supply glut just as China's economy was slowing.
"The more investor-heavy customer base of the Dalian Commodity Exchange has continued to short sell for some time now on Chinese economic concern," said Jamie Pearce, head of SSY Futures Singapore.
Open interest, or open contracts, on the benchmark iron ore contract surged nearly eight-fold from July to more than 1 million lots in November and prices tumbled 25 percent during that period, according to Reuters data.
Volume traded on the bourse reached 67.6 million contracts in its first year to Oct. 17, exchange data showed. In comparison, volume for swaps and swap futures on the Singapore Exchange, the dominant marketplace for swaps, was just above 2 million lots in roughly the same period.