Research On Iron Ore Futures’ Influences On Steel Enterprises In China

The steel industry in China experienced years of great prosperity. It has been one of the pillar industries in the economic development of China for long. However, it has been facing difficulties in recent years which it never came across before. The business in this industry has been reporting deficit for a very long period of time. And one of the main factors caused this deficit is the rapid and continuous rising of the price incredibly for iron ore which is the principal raw material for the industry. The monopolization of the Three Mines (Vale, Rio Tinto and BHP) and the huge demand for iron ore in China pushed the price of iron ore staying all the way in high. In pace with the international pricing mechanism for iron ore going from Long Agreement to Quarter Pricing then to Index Pricing, the iron ore futures came into being as the times require.This paper studies on the influence brought by iron ore futures through literature study, step by step analysis and on site investigation. Firstly, this paper summarizes the iron ore futures in foreign countries. The flourishing of iron ore futures in foreign countries opened the gate for global steel enterprises for risk control. Nevertheless, because of a series of reasons, the Chinese steel enterprises could not participate in this game actively. As many people looking forward to it, the first and the sole iron ore futures till now in China-Iron ore futures on Dalian Commodity Exchange emerged as the times require. This paper analyses the main influential factors brought by iron ore futures’ coming into market in China by applying analysis in the three factors which are:the opportunities and threats in the economic environment the Chinese steel enterprises are facing, and the strengths and weaknesses of them.In consideration of the above listed influences brought by iron ore futures in China, this paper starts the arguments on the iron ore futures’ influences on the Chinese steel enterprises. The traditional fluctuating rhythm of physical commodities’ price was broken due to the price influences of iron ore futures on its physical counter-part. As the function of price discovery of futures market revealed itself, it would bring beneficial effects to the line operation of the Chinese steel enterprises. Thanks to the enrichment of large steel futures, the steel enterprises could do hedging by using financial instruments in a better way. As for the risk of iron ore futures, this paper proposes several recommendations, including training professional personels, setting equitable financial policies and transaction system. By making use of advantages and enforcing risk control, the maximization of benefit for steel enterprises under the condition of minimum risk will be realized. Meanwhile, as the perfection of varieties of large steel futures, it will be possible for the "Virtual steel plants" to be formed consisting of matching futures varieties.The study of this paper comes to this conclusion:the Iron ore futures on Dalian Commodity Exchange in China has already revealed preliminarily its functional characteristics of price-discovery because of its design features on contract, and it is easy to bring about hedging of matching products, so as to become an efficient instrument on risk control, hedging, improving operational management level for enterprises.