Corporate  Banking
Corporate Deposit
Loan Financing
Financing Lease
Bill Business
Settlement Service
Corporate Wealth Management
Corporate E-banking
Investment Banking
Assets Custody Business
Institutional Banking
Corporate Annuity Service
Small Business Finance
More Services
Financial market
  Corporate Risk Management
     -  Business Profile
     -  FX Interest Rate Swap
     -  Forward FX Interest Rate Swap
     -  Progressive FX Interest Rate Swap
     -  FX Interest Rate Swap under Remittance Payment Link
     -  FX Term Interest Rate Range Products
     -  FX Interest Rate Cap (Terminated by Cumulative Times)
     -  FX Interest Rate Cap (Terminated by Cumulative Return)
     -  FX Interest Rate Swap Option
     -  RMB Interest Rate Swap
     -  RMB Forward Rate Agreement
     -  Forward Foreign Exchange Settlement and Sale
     -  Forward FX Trading
     -  RMB/FX Currency Swap
     -  RMB-Foreign Exchange Swap
     -  FX Swap
     -  RMB-Foreign Exchange Option
     -  FX Option
     -  Commodity Forward Trading
     -  Commodity Swap
     -  Dual-currency Forward Exchange Sales and Settlement
  Products & Services
  Bond Trading and Settlement
Internet Finance
  Home Page > Corporate Banking >Financial market >Corporate Risk Management >Commodity Swap
Commodity Swap

I. Introduction
A contract between a company and ICBC to buy and sell an underlying commodity at a fixed price (in USD) for a set amount of time (no commodities are exchanged during the trade).

Underlying commodities mainly include: base metals - copper, aluminium, lead; precious metals - gold, silver, platinum; energy - 180 cst Singapore oil, 380 cst Singapore oil, WTI crude oil, Brent crude oil; bulk commodity - pulp, iron ore.

Iron ore swap deals are common in the international commodity market. The most commonly used indexes are based on spot physical iron ore delivered in China. Internationally, iron ore is priced against any of the three iron ore reference indices published by information providers: Platts, The Steel Index (TSI) and Metal Bulletin Iron Ore Index (MBIO).

II. Target Clients
Corporate clients who have a good knowledge about international commodity market and need to manage the commodity price risk. They are mainly bulk commodity producers, steel plant and traders.

III. Functions and Features
Simple structure, easy to understand, by participating in the international commodity market through ICBC, customers can sell (long hedge) or buy (short hedge) to hedge from a rise or fall in the commodity price.

IV. Advantages
1. Tailored solution: ICBC offers solutions tailored to the needs of customers.
2. Transparent, good price: ICBC prices are closely in line with international market. Moreover, ICBC, being one of the most influential active participants in international interbank market, is able to offer good prices to customers.

V. Service Channel and Hours
Eligible customers are welcomed to apply during banking hours at any ICBC branch licensed to offer the service.

VI. Sign up
1. Sign master agreement: Customer who wishes to enter commodity swap trading contract must sign with ICBC the ICBC Risk Management Service Agreement.

2. Assess the customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control) and go through the Customer Evaluation Form filled in by customer. Suitable products will be recommended based on the level of risk that the customer can afford to take.

3. Place order and read ICBC risk statement: As a principle for responsible and prudent trading of copper, customers who have performed risk assessment and understood the nature of risk inherent in forward contracts are welcomed to enter one contract at a time with ICBC by signing ICBC Customer Confirmation on Financial Derivatives for Corporate Accounts.

4. Supply guarantee: Customer has the choice to pay margin or provide collateral, or use the credit line specially granted for trading derivatives. During the validity period of the contract, ICBC will provide dynamic management services on the guarantees according to the market value of the commodity forward contract.

VII. Risk Warning
Commodity prices in international market may fluctuate depending on the international and domestic political and economic conditions and other sudden events. All risks and losses after settlement shall be borne by the customers. Under no circumstance ICBC shall be liable.

VIII. Definition & FAQs
A commodity swap deal has fixed price and floating price.

Fixed price: Buy/sell prices stated in the contract.

Floating price: Reference price stated in the contract for the underlying commodity, eg. average price of iron ore index with a certain period.

Take SWAP traded contracts in iron ore as an example, which use iron ore index. Iron ore swaps are cash-settled swaps since there are no physical deliveries.

IX. Notes
Commodity swap trading contracts should be settled as early as possible. Head Office, branch and customer should be kept informed at all times. Communication must be clear, fast and accurate to avoid the loss due to market price fluctuation.

X. Example
In January, 2010, the iron ore fines (62% Fe) - CFR China Port was USD 106 per tonne. A steel plant has just concluded a deal to supply steel plates in 2010. To lock down the cost, the steel plant planned to import in March 2010 75,000 tonnes of iron ore fines (62% Fe).

To hedge the position, the steel plant paid USD 105.5 per tonne. The steel plant entered a swap contract to buy iron ore fines (62% Fe) using CFR China Port price for March 2010.

Due to tight supply, the iron ore fines (62% Fe) - CFR China Port price moved from USD 106/tonne in March, 2010 to USD 109/tonne.

Increase cost = (USD 109/ tonne - USD 106/ tonne) * 75,000 tonnes = USD 225,000
Swap gain = (USD 109/ tonne - USD 105.50/tonne) * 75,000 tonnes = USD 262,500
Total gain = USD 262,500 - USD 225,000 = USD 37,500

By entering the swap contact, the steel plant successfully hedged against price risk and locked down the gain.

Note: Information herein is for reference only. Refer to the announcements and regulations of local outlets for further details. Industrial and Commercial Bank of China Limited reserves the final right of interpretation.