Chaotic trade in Chinese commodity futures is offering new opportunities for international exchanges that are trying to get raw material traders to manage their risks amid high turnover and price volatility on mainland exchanges.
Last year, exchanges in China posted record turnover in commodity futures contracts. That underscored ample liquidity and a strong risk appetite in the world's largest consumer of many raw material products, including key steel-making material iron ore.
That is, China is changing the dynamics of trade from price-setting to risk management. But outside of the country, steel and its related derivatives are still trying to attract greater participation — unlike high-profile economic barometer counterparts such as copper and crude oil.
Still, a changing trade environment with China as a major participant is spurring hedging in a market plagued by price swings.
Some traditional steelmakers, notably in Europe, are already hedging in some of the derivative products due to price volatility, according to Jarek Mlodziejewski, ferrous derivatives analyst at The Steel Index.
And while the Chinese can trade and arbitrage between onshore and offshore markets, it is difficult for international traders without a licensed subsidiary in China to trade on the mainland.
This is where international exchanges can step in as a platform to engage with a potentially huge market seeking to manage risk globally.
One of the exchanges that has already gained a foot in the door is the Singapore Exchange (SGX), which in the last few years has seen growth in its iron ore derivatives. Its most heavily traded iron ore futures product saw a 17 percent rise in trade volumes in March from a year ago and a 50 percent rise from February. They fell 7 percent from a year ago in April.