October 21, 2016
SINGAPORE — In the US$7 billion (S$9.8 billlion) 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.
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.