It's two weeks since China's first iron ore futures contract started trading and so far volumes and open interest are robust and prices are slightly lower.

For the authorities in Beijing, it's a case of "so far, so good" for their goal of gaining more control over the pricing of the steel-making ingredient from the big three mining companies that dominate global trade.

However, even though the Dalian Commodity Exchange's (DCE) contracts have been well received, it's way too early to say they are the start of a successful revolution for the way iron ore is traded in China, which buys about two-thirds of global seaborne cargoes.

What we have learnt since the DCE launched the iron ore futures on Oct. 18 is that there is significant interest in hedging and trading within the Chinese steel community.

The most-active contract, for May delivery, opened with volumes of just above 300,000 lots, and has since settled just above 100,000 lots, with open interest around 90,500 lots at the start of trade on Oct. 31.

While traders report there is interest from major domestic steel companies such as Baosteel and Angang , so far the bulk of volume seems to be coming from smaller traders and speculators.

This is partly because the small size of the each lot, namely 100 tonnes, is attractive to less well-capitalised players and partly because the bigger players tend to be institutionally cautious and are waiting to see how well the market works.

The DCE is confident it can ensure the quality of delivered cargoes and the timeliness of delivery, but some likely participants will wait to see if this is indeed the case.

It's also likely that the major producers, the Anglo-Australian pair of Rio Tinto and BHP Billiton and Brazil's Vale, will also be cautious.

While they can trade through Chinese subsidiaries, the lack of yuan convertibility is always an obstacle for foreign players wanting to trade on China's exchanges.

ARBITRAGE TRADING

It's also likely that Rio and BHP will only use the DCE contracts when the arbitrage is in their favour, for example if they can sell on the DCE while buying swaps on the Singapore Exchange (SGX) and make a profit.

This arbitrage trade is likely to drive volumes on both exchanges, rather than see the DCE replace the SGX as the dominant player in the paper iron ore market.

Given its strong start, it's entirely possible that the DCE will overwhelm the SGX on a volumes basis, but this is only because it will attract large numbers of domestic Chinese players who are restricted from trading abroad.

The iron ore swaps market is worth about $28 billion a year, and it traded about 127 million tonnes in 2012, or roughly a tenth of the total seaborne market.

So far the DCE's most liquid contract has tracked the equivalent SGX swap closely on a price basis, but there has been enough of a difference to interest arbitrage traders.

The DCE contracts will also give Chinese steel mills and other buyers another reference price, other than those from data providers Platts and Metal Bulletin .

There has been unhappiness among both China's steel buyers and authorities over the use of indexes to set iron ore prices, with accusations that the big miners are able to manipulate the market by withholding volumes in order to drive up prices.

The most recent was by Wang Xiaoqi, vice-chairman of the China Iron and Steel Association, who said on Sept. 25 the major miners were reducing volumes sold by long-term tenders in order to push up global index prices..

The National Development and Reform Commission, China's top economic planner, has made similar claims in the past, although evidence of market manipulation is lacking.

It's also possible that Chinese buyers have engaged in some manipulation of their own, most notably by reportedly reneging on cargoes and buying them back at lower prices in the third quarter of 2012, when the spot iron ore price plunged 42 percent between April and September of that year.

The real value of the DCE contracts is that they provide more transparency in the market, and because they are deliverable they should do much to combat accusations of market manipulation.

But that doesn't mean the DCE will become the de facto price benchmark for iron ore.

As long as supply is concentrated in the hands of relatively few producers and demand from Chinese buyers remains strong, the miners will still carry the upper hand in deciding which benchmark they will use.

However, the rising supply from Australia and long-held market expectations (which have yet to be met) of slowing Chinese demand growth for steel could alter the equation.

If the DCE contract proves effective from a delivery point of view, and China goes further to relax its currency controls, then the dominant benchmark may well shift.