© 2013 Platts, McGraw Hill Financial. All rights reserved.

Iron ore price benchmarking

Francis Browne, Editorial Director, Price Group

Americas iron ore, Rio de Janeiro, November 11th, 2013

Agenda

• Forward curve analysis

• Scrap versus iron ore

• Contract mechanisms – floating prices

• Pellets, lump and premiums

• Methodology update

2

Introducing Platts

• Founded in 1909, Platts is the world’s largest energy and metals information provider

• Every day, more than US$10 billion in trading activity and term contract sales are based on Platts

• Platts brings transparency to the market

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Price Reporting $

Breaking News !

Assessments

Market Reports

Platts Global Positioning

• More than 1000 professionals across 20 offices

• Over 10,000 customers in over 150 countries

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Singapore

Beijing

Shanghai

Hong Kong

Tokyo

Melbourne

London

Moscow

Dubai

Sao Paulo

Buenos Aires

New York

Washington

Houston

Pittsburgh

Boston

Denver

Evergreen

Hightstown

Westminster

Platts Focus: The Spot Market

• Spot prices are established at the margin

• Term contracts are priced on spot market assessments

• Derivatives settle off spot prices

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Platts assessments

Platts Focus, Impact and Relevance

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• Platts benchmarks are used to price term contracts

• Futures settlements are often tied to spot market Platts covers

• Derivatives “price out” against Platts spot price assessments or futures settlements

Futures

OTC Derivatives

Term Contracts

Spot

Observed trades

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Spot market transactions

• In 2012, Platts observed 75.4 million tons (in 737 trades)

• of spot iron ore transactions.

• This figure is about 10% of the total seaborne volume China imported that year

• Spot transaction volumes change according to various factors, one of the most important being the rate of performance of long-term contractual volumes

• Generally speaking, LTC performance is good when there is less price incentive to buy spot.

8

IODEX in its 6th year

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What is the forward curve telling us?

About iron ore value in the future

Long term average = $130.59

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Front year analysis

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Forward curve

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2013 Cal14 trade vs spot

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Volume of swaps cleared at SGX

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DCE iron ore futures launch 18.10.2013

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16.935.000

5.201.300 4.940.600

6.122.800

8.870.000

5.441.300

4.342.900

5.445.400

6.210.700

3.857.700

16.457.600

8.897.100

5.511.500

3.587.700

4.736.400

3.594.200

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Volume per day Mt

110,152,200 Mt

Forward curves conclusion

• FC calendar periods are in backwardation

• Most offer a value for 2014 around $115 - 120

• 2015 and 2016 between $100 and $110

• As we have seen they are getting more accurate, but still price in supply-side/downside

• Non-dynamic and pessimistic

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Iron ore versus scrap

Brief analysis

Iron ore vs Scrap

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Scrap as a differential to iron ore

20

A closer look at 2013

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Atlantic HRC

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Will scrap displace iron ore?

• The US has a near 70:30 ration in favour of scrap

• EU its nearer 55:45 in favour of scrap

• China is lower than 85:15 in favour of iron ore

• Will this change?

23

Not in the short to medium term

• Scrap is less price elastic than iron

• Steel production growth in the mid-term requires iron ore

• Coking coal shortage is less of an issue

• China has a very different metallurgical profile than the US – historical modelling does not apply

24

Floating prices in iron ore

Iron ore trade continues to evolve

IODEX 62% CFR China is Now a Global Benchmark

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There is no universal price mechanism

• All mechanisms use a published base price

• Many contracts have moved to monthly

• Most require a provisional value

• Shorter term pricing has led to better contract performance

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Changing pace of contract market

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Floating contract pricing

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• Most floating prices are basis an index value +/- a delta

• Typically they price a quotation period (QP) against the average of an index over a specified period.

• Usually that period is a month, it could also be loading dates either side of a B/L date or NOR dates

What do Price Differentials Express?

• Why does the market apply premiums or discounts to published benchmark prices?

– Quality differences (Chemical, Physical, Metallurgical)

– Locational differences

– Terms and conditions differences

– Most importantly: timing differences

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Typical examples or floating price quotes

• Month average plus/minus delta in $/mt

– Dec QP +2

– Dec QP -2% +3

• Notice of readiness (NOR) or B/L date

– NOR +/-5(days) -2

– B/L +/5 +VIU +3

• Periods around shipping dates are often the average of index, 2 days prior - B/L date - 2 days post.

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• Spot deals on index-linked basis have increased in prevalence as market seeks to mitigate price volatility

• Differentials to key indexes (62%-Fe IODEX, 58%-Fe) used as expressions of differences in quality/value-in-use and timing

• Trend mirrors developmental path in mature markets like oil, in which a large portion of spot transactions are index-linked

• Market participants buy or sell physical on a floating basis, and hedge their exposure by selling or buying paper on a fixed-price basis

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Emergence of Floating Price Activity in Spot Market

Floating Price Activity in Spot Trading – Examples

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Differential expression

Actual examples

Product Pricing basis Quotation period

Flat price 61%-Fe Pilbara Blend Fines 62%-Fe IODEX +$1/dmt

Month of BL

63%-Fe Standard Sinter Feed Guaiba (SSFG) (Bid by Shandong Wanbao)

Platts IODEX + 1%-Fe differential +$0/dmt

5 days before and after NOR (discharge port), excl. NOR date

61.8%-Fe Brazilian fines with 7.4% SiO2 (Mineracao Usiminas)

IODEX +flat-price discount per 1% silica exceeding 4.5% (bidder seeking smallest discount quantum wins cargo)

10 days before and after BL

63%-Fe Newman Lump IODEX +$0.16/dmtu Month of delivery

58%-Fe Indian fines (Fomento Resources)

Platts 58%-Fe +$0/dmt minus Freight

5 days on and after offer date

Percentage 57%-Fe Super Special Fines Dmtu value of 62%-Fe IODEX -3% 5 days on and before NOR (discharge port)

Spot Activity Concentrated Around 4th-5th Week Forward (Middle of 2-8 week forward assessment window)

0

5

10

15

20

25

30

35

40

45

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74

Nu

mb

er o

f ca

rgo

es

Days forward from transaction date

Cargo delivery timings by origin

Australia

Brazil

India

South Africa

(Spot transactions observed Jan-Dec 2012)

Source: Platts

Concentration of spot activity determines the “mid window” that is the target of Platts normalization for timing

Pellets, lumps and premiums

Lump assessments

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Lump assessments

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Pellet assessments

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Pellet assessment formula

• Previous months average netback

• Pervious months average Fe differential (x3)

• Market assessed premium*

• Factored to 65% to give a dmtu value

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Pellet assessment formula

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Atlantic Pellets October IONBB03 = September average Brazil netback = $104.231 IOMGD03 = August Fe average = 2.400 x 3 = $7.200 *Premium assessed = $37 = 148.431 / 65 = dmtu = 228.36 cents

Freight netback

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Methodology update

Bringing more information and transparency

Key developments

• Launch stand alone dry bulk freight assessments

• Concentrate – brand relativity

• A 58% Fe low alumina quote

• Trade sheet

• Assess more periods in the forward curve

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Thank you

Happy to take questions…