© 2013 Platts, McGraw Hill Financial. All rights reserved.
Iron Ore Pricing: A Review of Methodology and the Emergence of Floating Price Activity
Keith Tan, Managing Editor, Steel Raw Materials
Singapore, May 31, 2013
Agenda
• Platts price discovery process
• Growth in transparency and trading platforms
• Floating price activity and its relation to quality
and timing
2
Platts a unit of McGraw Hill Financial (NYSE: MHFI)
3
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 benchmarks, in the oil, gas, petrochemical, metals and shipping markets
• Platts brings transparency to the markets through active spot price reporting, market commentaries and a published assessment methodology
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6
Daily and Real-Time Publications for Iron Ore & Coking Coal & Steel & Freight
7
Platts Focus, Impact and Relevance
8
• 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
Platts Focus: The Spot Market
• Spot prices are established at the margin
• Term contracts are priced on Platts assessments
• Paper swaps prices settle off spot prices
9
Platts
assessments
Large Spreads Between Term and Spot Trigger Pricing Shifts
45
65
85
105
125
145
165
185
04/01/07 10/01/07 04/01/08 10/01/08 04/01/09 10/01/09 04/01/10 10/01/10 04/01/11 10/01/11 04/01/12
$/mt Last 5 years of iron ore prices (62%-Fe basis)
5年以來鐵礦石現貨價格的走勢年以來鐵礦石現貨價格的走勢年以來鐵礦石現貨價格的走勢年以來鐵礦石現貨價格的走勢(62%品位為基準品位為基準品位為基準品位為基準)
Spot price IODEX (CFR CHINA)
Contract price (FOB AUS)
Quarterly Monthly/shorter termAnnual “benchmark” pricing
IODEX 62% CFR China is Now a Global Benchmark
11
12
Characteristics of a Good Benchmark
Adherence to international norms of trading
High degree of transparency
Benchmark assessment methodology is clearly defined
Benchmark assessments are open to industry scrutiny
Market acceptance
Chain formation – high degree of circulation
Leads to the development of a forward market
Agenda
• Platts price discovery process
• Growth in transparency and trading platforms
• Floating price activity and its relation to
quality and timing
13
Key Characteristics of Physical Commodity Markets
• Illiquid
– Large cargo size and differentiated quality specs prevent cargoes from changing hands multiple times
• Opaque
– Bilateral/OTC nature of negotiations means participants don’t know, at each point of time, what the best bids/offers in the market are
• Non-standardized
– Variations in quality, delivery timing, cargo size, payment terms need to be accounted for in the generation of an accurate spot price assessment
14
Spot iron ore transactions Platts observed
• In 2012, Platts observed 75.4 million mt (in 737 trades) worth 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 uptake/performance of long-term contractual volumes
• Generally speaking, LTC uptake/performance is strong when there is little incentive for counterparties to obtain cargoes through the spot market as an alternative means (effected when the spread between spot and LTC prices is thin)
15
Key Characteristics of Physical Commodity Markets
• Now, compare this with SHFE rebar futures,
for example:
– Highly liquid: Millions of transactions a day
– Transparent: Electronic trading enables real-time visibility
of bid/offer spreads and transaction levels
– Standardized: Fixed contract specifications
16
Platts Assessment Reflects Marginal Price
17
Iron ore market Rebar futures market
150
149
150 150
149
148
145
146
143
142
141 141
140
139
140
138 138 138
139 139
Assessment of price at
margin constrained by
lowest offer, highest bidSellers and
buyers often
apart in
tradable price
ideas
xx
x
x
x
x
xx
xx
xxx
x
xx
xx
x
xx
xxx
x
x
x xxx
x
x
Weighted-averaging best suits
highly liquid markets
x
xx
Sellers and buyers
intersect multiple
times
Iron Ore Prices Increasingly Responsive to Related Markets
18
Platts
assessments
are time
sensitive and
clearly time-
stamped
How Data is Analyzed: Time Sensitive Data
19
Time stamps
allow for true
reflection of spreads
Value is a Function of Time
Price
Time11 am 3 pm 5:30 pm
Best offer: $140
Best bid: $135Deal done:
$136 Best offer: $134
Market on Close
Best bid: $132
How the Assessments Appear in the Newsletters
21
Specifications: Exactly What is Being Assessed
22
Platts IODEX Specifications
62%-Fe Iron Ore Fines
Assessment window: Based on information collected up to market close as of 5.30 pm in Singapore/Beijing/HK (3 pm in New Delhi, 10.30 am in London)
Timing: Delivery 2-8 weeks forward from publication date
Basis: CFR North China, normalized to Qingdao
Cargo size: Minimum of 35,000 mt
Credit terms: Letter of credit at sight
Quality Specifications: Sizing up to 10 mm for up to 90% of cargo,
Iron 62%, Aluminum dioxide 2%, Silicon dioxide 4.5%, Phosphorus 0.075%, Sulfur 0.02%
23
Platts Position in Iron Ore and Coking Coal Pricing
• Platts is the first to publish daily spot price assessments Iron ore: since June 2, 2008Coking coal: since March 15, 2010
• Platts IODEX is the most widely used, with more than 90% of seaborne, physical iron ore priced against it
• Coking coal contract prices are mostly negotiated quarterly, but index-linkage is increasingly prevalent with suppliers in Colombia, Indonesia and Australia
• As we speak, the Q2 2013 coking coal benchmark is breaking down as a result of spot transactions being done much lower than that
24
Platts Iron Ore Quality Normalization
Normalization
• Quality is but just one aspect of normalization
carried out on information obtained
• Other parameters normalized include volume,
timing, location, and payment terms, for example
26
X X
62%Fe
CFR Qingdao
� Timing/Delivery dates
� Quality
� Quantity
� Location
� Terms of trade
Normalization Makes Sense of Variations in Trading Dimensions
27
Iron Ore Quality Normalization
28
- Quality differentials established through a survey with medium-to-large Chinese steelmakers
- Enables comparison of iron ore qualities based on technical merit - Cross-checked with spot transactional data obtained, and adjusted to
reflect changes in market conditions
Fe Alumina Silica Phosphorus Sulfur 62% 2-4% 4.5-5.5% >0.075% >0.07%
positive negative negative negative negative per dmtu -$0.75 -$1.50 reject reject
Note:Phosphorus and sulfur: Most buyers tend to reject cargoes exceeding these thresholds, and those that are accepted are usually with a sharp discount requested. The discount may or may not be linked to the cost of dephosphorization/desulfurization, as there tend to be other market-related contributing factors that may be the result of bilateral negotiation.
Representativeness
• Every steel mill evaluates iron ore qualities differently depending on its facilities, and availability of domestic ore
• As Platts iron ore assessments are on a CFR China basis, the quality differentials are reflective of the medium-to-large Chinese mills surveyed
• Regional differences shown by mills in other parts of NE Asia and Europe are more opaque owing to their lower reliance on spot material, but this is changing as they realize how it is also possible to obtain premium material from the spot market
29
Agenda
• Platts price discovery process
• Growth in transparency and trading platforms
• Floating price activity and its relation to
quality and timing
30
What Transparency Brings About
• Increases confidence in price benchmarks
• Encourages responsible behavior
• Simplifies participation in the price discovery process
• Establishes high quality information for
decision making
Increase in Informational Transparency
• Platts real-time deal, bid and offer information
disseminated widely in marketplace
• Named counterparties in daily reports has become
the norm
• Market’s demand for transparency increases
32
Increase in Informational Transparency
• Tender and deal information now promptly available,
with Platts editors at nexus of the market
33
Iron ore, 57.6%-Fe Australian Yandi fines -- BHP Billiton sold at
$104.68/dmt CFR Qingdao , 170,000 mt, loading Sep 25-Oct 4
Iron ore, 65.27%-Fe Brazilian Iron Ore Carajas Fines (IOCJ) -- Vale sold at
$121.76/dmt CFR China, 240,071 mt, passing Singapore Oct 18, Al 1.13%, Si
2.58%, P 0.041%, Mn 0.49%, LOI 1.79%, moisture 8.4%, traders who received
the tender said Iron ore, 64%-Fe Brazilian Lump Ore Blast Furnace Tubarao (LOBT) -- Vale
sold at $117/dmt CFR China, 80,000 mt , passing Singapore Oct 23, Al 1.4%,
Si 4%, P 0.065%, Mn 0.15%, LOI 2.7%, according to traders who received the
tender
Increase in Informational Transparency
More than 50 named counterparties published in Steel Markets Daily since October 2011
34
Bagadiya Brothers Fuyi Wuzi Noble Resources Stemcor
Baosteel Resources General Nice Palabora Mining Co. Sundial Minerals
BHP Billiton Glencore Poly Resources Swiss Singapore
BM Holding Hebei Jingye Prosperity Steel United Synergy Resources
BST (HK) Hebei Shenglun PT Resources Tangshan Ganglu Steel
Cargill Hebei Steel Radiant World Tianjin Tiantie Metallurgical Group
China Railway Materials Henan Chaoyang Rio Tinto Toptip Holding
Citic Pacific Special Steel Hunan Valin Steel Rizhao Zhongrui Trafigura
CNBM Iron Ore Company of Canada Rungta Mines V.M. Salgaocar
Concord Fortune Jindal Steel & Power Ltd Sesa Goa Vale
Continental Resources KIOCL Shandong Chuanyang Steel Xiamen C&D
Essel Mining KMG Shandong Huaxin Xin Wu An Iron & Steel
Fengli Group Masteel International Shandong Wanbao Xinsha International
Focus Trading Metinvest Sinochem International Yanshan Steel
Fomento Resources Minmetals SinoGiant Zhejiang Materials International
Frost International MMTC Transnational Sinosteel Trading Zheshang Holdings
Physical Iron Ore Trading Platforms
• China Beijing International Mining Exchange (CBMX)
was launched May 8, and GlobalORE, May 30, 2012
• Counterparties are anonymous, and the available
details of each cargo’s specifications vary
• Transactions on the platforms and their eventual
performance cannot be verified by Platts without
counterparty information
35
Physical Iron Ore Trading Platforms
• Already prior to the launch of the platforms, the
market has become used to having details of trades
being furnished in reports like Steel Markets Daily
• Buyers and sellers need to know the full details of a
cargo, including specific brand/quality that they will
take delivery of/deliver, at the point of transaction
• Where there is uncertainty over the full details of a
trade, whether on or off a platform, Platts may
choose not to use it for assessment purposes
36
Quality of Information Varies
• The quality of the information we acquire varies
widely, and Platts has an interest to use only good
quality data for assessment purposes
• Quality information has the following characteristics:
– Transparent
– Verifiable
– Firm
– Eventually performed on (in the case of transactions)
37
Next Step in Transparency: eWindow
• Platts launched March 22 the eWindow for iron ore，
an online platform that is used as a communications
tool in Platts price discovery process
• Platts Editorial Window, allows market participants to
communicate bid, offer and transaction data to Platts
electronically with that information published in real-
time and visible to all subscribers.
38
Next Step in Transparency: eWindow
• Platts first introduced eWindow for petroleum
markets in Asia back in 2007. It was rolled out
gradually to other markets and is currently used as
part of the price assessment process in more than a
dozen petroleum markets.
• The technology behind eWindow was customized for
the Platts price assessment process under a license
agreement with ICE.
39
Agenda
• Platts price discovery process
• Growth in transparency and trading platforms
• Floating price activity and its relation to
quality and timing
40
Current State of Term Contract Pricing
41
Region Frequency of steel
pricing
Long-term contracts Spot purchases
China Monthly, every 10
days, or spot
Mostly priced on
monthly averages of
published indexes,
with some quarterly
averages
A large number of
contracts are also
based on 5-10 day
index averages
around Bill of Lading
or Notice of
Readiness
Proportion ranges
widely, from almost
none for large, state-
owned mills, to 100%
for small and
medium-sized private
mills
Japan, Korea, Taiwan,
Europe
Half-yearly or
quarterly, or on
contract basis
Mostly priced on
quarterly averages
Rarely, but some are
considering
increasing spot
proportions
• 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 majority of spot transactions are
index-linked for certain markets
• Market participants buy or sell physical on a floating
basis, and hedge their exposure by selling or buying
paper on a fixed-price basis
42
Emergence of Floating Price Activity in Spot Market
Floating Price Activity in Spot Trading – Examples
43
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)
61%-Fe fines (illustration for
product that’s new to the
market)
[(61/62%-Fe IODEX) * 103% -
$7/dmt]
(103% expresses VIU; $7 as silica
discount)
Month of BL
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
44
Recall Platts Specification for Timing
45
62%-Fe Iron Ore Fines
Assessment window: Based on information collected up to market close as of 5.30 pm in Singapore/Beijing/HK (3 pm in New Delhi, 10.30 am in London)
Timing: Delivery 2-8 weeks forward from publication date
Basis: CFR North China, normalized to Qingdao
Cargo size: Minimum of 35,000 mt
Credit terms: Letter of credit at sight
Quality Specifications: Sizing up to 10 mm for up to 90% of cargo, Iron 62%,
Aluminum dioxide: 2%, Silicon dioxide 4.5%, Phosphorus 0.075%, Sulfur 0.02%
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
of
carg
oe
s
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
Market-on-Close: Guiding Concepts
• Physical prices take precedence over swaps prices
• Outright prices take precedence over floating prices
• Platts assessment process takes into account the
value of the daily backwardation or contango
• Gradient of backwardation/contango can be derived
from swaps forward curve
47
Prompt Deal Carries Time Premium in a Backwardation
48
135
137
139
141
143
145
147
149
Weeks
Premium
0
Mid window 820
Deal at $145 for cargo arriving 3rd week forward
Mid window: Target point of normalization
Prompt Deal Carries Time Premium in a Backwardation
49
135
137
139
141
143
145
147
149
Weeks
Discount
0
Mid window 820
Deal at $140 for cargo arriving 7rd week forward
Mid window: Target point of normalization
Valuing Daily Backwardation Using Swaps: A Simplified Illustration
50
135
137
139
141
143
145
147
149
0
May
May swap: $145
Jun swap: $143
Daily backwardation = (145-143) / 30 days
= $0.067
Jun Jul
X
X
Calculating Value of Backwardation
51
135
137
139
141
143
145
147
149
Weeks
Premium
0
Mid window 820
IF
Time difference between deal and mid window = 18 days
AND
Daily backwardation = $0.067
Backwardation over 18 days = 18 * 0.067
= $1.21
Calculating Value of Backwardation
52
135
137
139
141
143
145
147
149
Weeks
Premium = $1.21
0
Mid window 820
Therefore, to normalize transaction for timing:
Transaction price - backwardation
= 145 - 1.21
= $143.79
Transaction = $145
Normalized = $143.79
Platts IODEX Swap Futures Forward Curve
53
Core Formula Underpinning Market Values
54
When Platts assesses a physical market, there can be only one value for a cargo of iron ore. That value can be expressed as an outright price, and a floating price.
The market reconciles value using the following simple formula:
Outright Price = Settlement basis plus differential
Core Formula Underpinning PlattsAssessment Process
55
The market reconciles value in real time using
the following simple formula:
Price = Swap plus differential
Px = Sw + Diff
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