After several months when the iron ore futures and steam coal futures were launched, the first steam coal and iron ore swap product in China made its first appearance in Shanghai Clearing House (hereinafter referred to as SCH) on August 4, which means under the market background where the prices of iron ore and steam coal experience sharp fluctuations, the iron ore and steam coal industries have developed a new edge tool for risk management.

The iron ore swaps of SCH has filled in the blank of iron ore derivatives in China. The market-maker system introduced by SCH provides industrial clients with the mobility of hedging, while industrial clients successfully realize active risk management through RMB iron ore swaps and steam coal swaps, lock raw material cost or selling profit in advance, and gain more stable business performance expectation so as to cope with market fluctuations of bulk commodity price in a calmer way.

Looking back on the history about the pricing of iron ore, we found that international iron ore trade adopted the long-term contract price model from 1960 to 1980 and the “long-term” pricing model set annually was used from 1980 to 2010. But as the long-term price negotiation broke down in 2009, international trade of iron ore has entered a stage that witnesses a co-existence of diversified pricing models such as index pricing and spot pricing, which has resulted in industries’ needs of risk avoidance. The release of iron ore futures and swaps enables China to have its own reference price of iron ore.

 However, judging from the supply and demand of steam coal on the spot market, the steam coal price is constantly declining as domestic economic growth slows down. The steam coal price has been experiencing sharp fluctuations since 2011 and the steam coal trade is also facing a relatively large risk exposure. The combination of steam coal futures and steam coal swaps is able to satisfy enterprises’ needs of risk avoidance and interest arbitrage to a large extent.