* Some SOEs gain approval to trade iron ore futures
* China state assets regulator loosens tight grip on trades
* Iron ore swap volumes rise as companies trial hedging
By Ruby Lian and Fayen Wong
SHANGHAI, Aug 2 (Reuters) - Chinese state-owned steelmakers
are preparing to enter the Singapore-based iron ore swaps
market, in a move that could boost liquidity in iron ore
derivatives as firms look to hedge volatile prices.
The step is another in the evolution of iron ore trading,
where benchmark prices were set by annual talks just four years
ago, and a further sign Beijing is relaxing its tight grip on
trading offshore commodities futures contracts.
Baosteel, China's third-largest steelmaker by
output, and Valin, the listed unit of the tenth-biggest
steelmaker Hunan Valin Group, have both won approval to trade
iron ore futures overseas, company officials confirmed.
"There have always been arguments over whether steel mills
should trade futures for hedging or not," said Wang Jun, vice
president of state-owned Hunan Valin Steel Co.
"We don't want the market to become overly speculative, but
when the trend is happening, we might have to face it and do
it," he said.
Chinese privately owned steelmakers and iron ore traders
have already been increasing their use of iron ore derivatives
this year, accounting for up to a third of the volume on the
Singapore Exchange's swap contracts in some months,
Liqudity jumped rapidly to 136 million tonnes in the first
half of 2013, traders estimate, compared with 110 million tonnes
in all of 2012, but is still dwarfed by the 1.1 billion tonnes
of physical seaborne iron ore traded each year.
The Singapore Exchange cleared more than 27 million tonnes
of iron ore derivatives in July, hitting a record high and more
than double the 10.4 million tonnes in July 2012, data showed.
The popularity of swap contracts has been boosted by a move
in 2010 to price iron ore based on indices like the Steel Index
<.IO62-CNI=SI> or the Metal Bulletin Iron Ore Index
<.IO62-CNO=MB>, which has increased price volatility.
China consumes more than two-thirds of physical seaborne
iron ore, while prices have swung from above $190 a tonne in
early 2011 to below $90 a tonne in September last year.
"More and more Chinese companies want to trade futures to
manage their risks," said Han Xun, The Steel Index's China
manager in Shanghai.
China's Minmetals Corp, a leading state-owned resources
trader, has started trading iron ore swaps. Other privately
owned mills that trade the paper include Rizhao Steel Holding
Group, Jiangxi PXSteel Industrial Co and the largest private
firm, Jiangsu Shagang Group, brokers said.
Beijing has kept a tight rein on overseas derivatives
trading by state-owned firms, particularly after they lost a
combined tens of billions of yuan by trading offshore futures
during the global financial crisis.
Previously, only 31 state-owned Chinese firms were allowed
to trade futures overseas, mainly for base metals, agriculture
products and oil, industry sources said.
Some state-owned enterprises (SOEs) had used their offshore
units to trade derivatives, circumventing supervision and
currency controls, they said.
"The government has actually eased its control on SOEs in
doing paper now, and firms can get approval easier than before,"
a senior official at Baosteel said, declining to be named as he
was not authorised to speak to media.
While the state-owned steelmakers are preparing to dip a toe
in swaps trading, their participation is unlikely to lead to an
immediate boost in liquidity due to China's tight regulations on
They also face quotas on how much they can trade and
restrictions on how they can trade, said The Steel Index's Han.
The companies themselves are worried about a lack of
experience in the market, and the fallout from any losses.
Valin, which produced about 16 million tonnes of crude steel
last year, said it plans to hedge no more than one tenth of the
total iron ore volume that it consumes a year.
"We are still grooming our team and are currently doing
trials," Valin's Wang said, without disclosing its quota and
However, the lessons learned will help the companies when
the China Dalian Commodity Exchange launches its own iron ore
futures contract later this year, which is expected to draw
heavy interest from local steel mills and iron ore traders,
Dalian will rival the Singapore Exchange, which dominates
the iron ore paper market by clearing more than 90 percent of
swap volumes, and the CME Group's iron ore futures.
(Editing by Richard Pullin)