Dalian Commodity Exchange has received regulatory approval to launch China's first iron ore futures, the latest salvo in the battle to control benchmark pricing of the world's second-most traded commodity.

The world's top importer of the raw material for steelmaking has been trying to wrestle pricing power away from global miners since contract pricing shifted from annual to spot-based in 2010.

Dalian's iron ore futures will be the world's first physically backed derivatives contract, making it a strong competitor against the cash-settled iron ore swaps contracts cleared by the Singapore Exchange (SGX) and CME Group.

The China Securities Regulatory Commission said yesterday it had given approval for the launch.

Dalian hopes to list the contract by the end of the year, a source with direct knowledge of the matter said, declining to be named as he was not authorised to speak to media. Buyers have the options of physical delivery and cash settlement.

The contract will have a lot size of 100 tonnes of 62 per cent grade iron ore. The exchange would also set premiums and discounts for different grades, the source said.

The Dalian exchange declined to comment.

Global miners Rio Tinto, BHP Billiton and Vale now sell iron ore to Chinese steelmakers based on indices such as the Steel Index, Metal Bulletin Iron Ore Index and Platts Iron Ore Index.

China set up its first physical trading platform last year in an effort to gain pricing power for iron ore.

A higher number of privately owned Chinese steelmakers and iron ore traders have been increasing the use of iron ore swaps this year as a hedging tool, while some state-owned firms are also preparing to test the derivative.

But their ability to hedge via overseas platforms has been limited by currency restrictions, and Dalian's futures product would allow strong participation from Chinese market players.

Trading volumes on SGX's iron ore swaps have surged this year amid increased price swings.

Iron ore prices have slipped from a record near US$200 a tonne in February 2011 to a three-year low below US$87 a tonne in September last year, according to the Steel Index.

The Shanghai Futures Exchange is looking at offering cash-settled iron ore futures.

China buys about two-thirds of the 1.1 billion tonnes of iron ore traded globally. Last year, it imported a record 743.55 million tonnes, up 8.4 per cent from the previous year.