The Dalian Commodity Exchange's iron ore futures market may prove limited in indicating the Chinese steel industry's changing demand for key raw materials, based on trading patterns and behavior to date, MVS said.

Minerals Value Service is a commodities analytics unit owned by Platts.

The DCE bourse in the northern Chinese port city has seen explosive growth in iron ore paper volumes, equivalent to around 28 billion mt of iron ore contracts traded since the commodity was introduced in October 2013, MVS said in a report.

However, liquidity is centered around three contract months, some four months apart, and varying volumes shifting from the front contract to the others with May 2016 the current focal point.

That pattern may indicate trading around longer-term drivers, rather than capturing short-term shifts in steel demand and on-the-ground changes to iron ore availability, MVS said.

There is risk a move in DCE's iron ore futures prices is not followed in other iron ore markets that more closely track shorter-term physical market, MVS said.

"Whilst traders and market participants may look to the DCE for trading cues, its peculiar trading pattern may reflect longer-term macro-economic factors affecting the iron ore market, rather than responding to short-term price signals and events," MVS senior analyst Winnie Tang said in the report.

DCE officials were not available to comment Thursday.

The Dalian Commodity Exchange is a futures exchange based in Dalian, Liaoning province, established in 1993. It trades futures contracts in iron ore, coking coal, coke, petrochemicals and agricultural products.

The DCE said in September it hoped to introduce changes to its iron ore futures by the year-end to boost liquidity across the forward curve.

With liquidity and prices for the yuan-based contracts centered at any time on one of three of the forward 12 months, the structure may be restrictive to hedging, MVS said.

Any DCE price signals may be less relevant to physical iron ore trade due to volatility on the exchange ahead of positions being closed ahead of future physical delivery.

The DCE is looking into improving liquidity over continuous months and, in the meantime, participants may be using the CME, SGX and other clearing houses in tandem to hedge months between the popular contracts on the DCE.

The DCE acknowledges speculators had been "playing a significant role". There are more than 240,000 participants on the DCE's iron ore market, of which about 4,000 are corporate clients, MVS said.

"It is possible that participation of speculators with limited knowledge of iron ore and steel fundamentals might be distorting real-life supply/demand pricing principles. If this is the case, then the trends observed in the DCE futures may be unreliable lead indicators for prices," Tang said.