← Back to Blog · 2026-09-03 · 6 min read · Strategy Case Study

You stare at the screen. You just got chopped out of another directional trade. The market gapped up on a macro headline, only to reverse and stop you out on a sudden inventory report. If you have been trading Chinese commodity futures for a while, you know the feeling. The volatility is a double-edged sword. But what if you could strip away the macro noise and trade a structural relationship instead?

Welcome to spread trading. Specifically, we are looking at the crack-spread equivalent of the steel sector: the spread between DCE Iron Ore and SHFE Rebar. Instead of guessing which way the broader market will break, you are trading the profit margins of steel mills. Let’s break down the logic, the exact contract specs, and how you can actually execute this setup.

The Logic Behind the Iron Ore-Rebar Spread

In the physical world, iron ore is the primary raw material, and rebar is the finished construction product. The price difference between the two essentially tracks the gross margin of a steel mill. When steel demand is booming and mills are running at full capacity, rebar prices rise faster than iron ore, expanding the spread. When the property sector cools and steel demand drops, rebar prices fall faster than the raw material, compressing the spread.

By trading this spread, you are taking a view on steel mill profitability rather than the absolute direction of the broader market. During the massive infrastructure and property stimulus pushes in recent years, we saw periods where steel margins expanded aggressively. Conversely, as the property sector cooled and environmental production curbs were implemented, those margins were violently squeezed. As a trader, your job is to identify when these margins have stretched too far in either direction and are due for a mean reversion.

Contract Specifications You Need to Know

If you want to trade rebar/iron ore spreads, you cannot just hit buy and sell blindly. You are dealing with two different exchanges and two very different contract multipliers. Getting your sizing wrong here will ruin your risk profile before the trade even develops.

Notice the massive difference in multipliers. One lot of Iron Ore controls 100 tons of the underlying commodity, while one lot of Rebar only controls 10 tons. If you try to trade a 1:1 lot ratio, you are taking on ten times the physical tonnage exposure in iron ore compared to rebar. That is not a spread trade; that is a massively leveraged directional bet on iron ore.

Calculating the Correct Hedge Ratio

To trade this properly, you need to decide what you are actually balancing. There are two main approaches: balancing physical tonnage, or balancing the physical conversion ratio (the crush spread).

1. The Tonnage Match (1:10 Ratio)

The simplest approach is to match the underlying physical tonnage. Since 1 lot of Iron Ore is 100 tons, and 1 lot of Rebar is 10 tons, you would trade 1 lot of Iron Ore against 10 lots of Rebar. This gives you a 1:1 tonnage exposure. However, because rebar is typically priced much higher per ton than iron ore, the notional value (and thus the margin requirement and nominal volatility) of the 10 lots of Rebar will be significantly higher than the 1 lot of Iron Ore.

2. The Conversion Match (2:10 Ratio)

In reality, it takes roughly 1.6 tons of iron ore to produce 1 ton of finished steel (rebar), accounting for waste and the iron content of the ore. If you want to trade the true economic margin of a steel mill, you need to reflect this conversion ratio. To cover 100 tons of rebar (10 lots), you need roughly 160 tons of iron ore. Since you cannot trade fractional lots, you round up to 2 lots of Iron Ore (200 tons) against 10 lots of Rebar (100 tons).

Which one should you use? The 2:10 ratio (Iron Ore:Rebar) is generally preferred by fundamental spread traders because it better reflects the actual physical economics of steel production. However, you must account for the fact that you are now slightly overweight iron ore tonnage, which means if both commodities crash simultaneously, your long iron ore leg will lose more absolute value than your short rebar leg. You must adjust your stop-loss accordingly.

Identifying the Setup: When Margins Compress or Expand

Now that we have the math out of the way, how do we actually find a trade? You are looking for extremes in the spread. Calculate the spread as the price of Rebar minus the price of Iron Ore (adjusted for your ratio). Track this over a rolling 60-day or 90-day window.

• Expanding Spread (Long Rebar / Short Iron Ore): You enter this trade when steel mill margins are historically compressed but you anticipate a demand recovery. For example, if property stimulus measures are announced and construction is expected to pick up seasonally, rebar demand will spike before iron ore supply can adjust. You buy 10 lots of SHFE Rebar and sell 2 lots of DCE Iron Ore.
• Compressing Spread (Short Rebar / Long Iron Ore): You enter this trade when steel mill margins are historically wide, but demand is showing signs of cracking. If real estate sales data is plummeting and steel inventories are piling up at mills, rebar prices will collapse faster than iron ore, which is often supported by global seaborne supply dynamics. You sell 10 lots of SHFE Rebar and buy 2 lots of DCE Iron Ore.

The key is to look for divergence. If both markets are trending violently in the same direction, the spread is just moving with the macro tide. You want to enter when the spread breaks out of its recent range independently of the broader market direction.

Executing the Trade: Rules and Risk Management

Spread trading in China futures requires strict discipline. Because you are holding two separate positions on two different exchanges, your broker's risk system will treat them as independent legs until manually recognized (if your broker offers spread margining, which many global retail brokers do not).

Entry Rules

• Wait for the spread to reach a 2-standard deviation extreme on a 60-day rolling basis.
• Confirm with a fundamental catalyst (e.g., seasonal demand shift, inventory data, policy announcements).
• Execute both legs simultaneously using limit orders to avoid slippage on one leg. Do not leg in and out of the trade unless you are an experienced local.

Stop-Loss Logic

You do not use absolute price stops on the individual contracts. If iron ore gaps up 5% overnight on a Brazilian supply disruption, your short iron ore leg will be bleeding, but your long rebar leg might also be rallying. You must place your stop-loss on the spread value itself. If the spread widens or narrows against your thesis by a predetermined RMB amount (e.g., 50 RMB spread expansion), you close both legs immediately. Accept the loss and move on.

Profit Target

Your target is the mean of the spread. Unlike directional trading where you want to let your winners run indefinitely, spread trades are inherently mean-reverting. Once the spread returns to its 20-day moving average, take the profit. Do not get greedy hoping for a fundamental paradigm shift.

Practical Application in Today's Market

To trade rebar/iron ore effectively, you need to monitor a few key data points. Keep an eye on the weekly inventory reports from major Chinese steel hubs. Watch for any announcements from the Dalian or Shanghai exchanges regarding margin adjustments or trading limit changes—Chinese exchanges are notorious for aggressively hiking margins and intraday limits during volatile periods to cool down speculation. If margins are hiked on iron ore but not rebar, your capital efficiency on the spread will suddenly change, and you may face a margin call if you are fully leveraged.

Before you deploy real capital into a live spread strategy, you need to see how your execution holds up under real market conditions. The slippage on the SHFE night session is different from the DCE day session. Your risk management system needs to be tested against live data.

If you want to validate your spread trading system without risking your live account, you can test your strategy on a real-data China futures evaluation at XS Select. Starting from just $29, you can run your system through our evaluation environment to prove your edge in the Chinese commodity futures market. We are a new platform, so we don't have a roster of millionaires yet—just a clean, honest environment for you to prove your own strategy. Build your track record, refine your spread execution, and see if trading the steel margin is the edge you have been looking for.