© 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
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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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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.
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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
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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?
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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
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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…