francis browne - platts - what's driving iron ore prices?

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

What’s driving iron ore prices?

Francis Browne, Editorial Director, Price Group

Americas iron ore, Rio de Janeiro, November 10th, 2014

Agenda

• Price review, physical and forward

• Supply base, brands and impurities

• Size matters; pellets, lump and concentrates

• The Atlantic basin

29

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

30

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

31

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

32

Platts assessments

IODEX physical and paper

33

Chinese steel prices

34

Steel prices in China have reduced

35

Physical and derivative markets

36

0.8

0.85

0.9

0.95

1

1.05

SHFE RB

Tang Billet

IODEX

DCE

Chinese steel margins

37

Chinese domestic concentrate prices

38

DCE volume in millions of metric tons

39

0

200

400

600

800

1000

1200

Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14

SHFE rebar volume in millions metric ton

40

0

100

200

300

400

500

600

SGX iron ore derivatives in metric tons

41

Price correlation or convergence?

42

0.8

0.85

0.9

0.95

1

1.05

IODEX

DCE

DCE delivery and IODEX window do not converge

43

DCE most liquid contract is always ahead of IODEX delivery window

DCE active month now switches to May 15

44

Focus and Relevance

45

• 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

Spot activity concentrated around cargoes arriving 4-5

weeks after transaction date (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

Spot activity concentrated around cargoes arriving 4-5

weeks after transaction date (middle of 2-8 week forward

assessment window)

0

5

10

15

20

25

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

Nu

mb

er

of

carg

oe

s

Cargo delivery timings by origin

Australia

Brazil

India

South Africa

(Spot transactions observed Jan-Dec 2013)

Source: Platts

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

Days forward from transaction date

Spot Activity Concentrated Around Cargoes Arriving 4-5 Weeks After

Transaction Date (Middle Of 2-8 Week Forward Assessment Window)

48

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

Source: Platts

Days forward from transaction date

Prompt Deal Carries Time Premium in a Backwardation

49

135

137

139

141

143

145

147

149

Weeks

Premium

0

Mid window 8 2 0

Deal at $145 for cargo arriving 3rd week forward

Mid window: Target point of normalization

Deal at $140 for cargo arriving 7rd week forward

Where does the data come from?

50

Grade differentials to IODEX 62

51

Steel demand/price impacts iron ore diffs

52

More differentials and size data

53

Meeting our IOSCO commitments

54

Methodology update

Providing more information and transparency

We launched a separate freight report

56

What's done and what is being considered

• Dec 13: Launched a low Alumina 58% Fe assessment

• June 14: Launched daily 1% impurity differentials

• July 14: Launched Dry Bulk Freight Wire

• Q4’14: Research specification changes to the 65% Fe assessment

• H1’15: Research volume change to the IODEX specification

• Offer more data and analysis through technology partnerships such as MVS

57

Thank you

Happy to answer questions and discuss price assessment methodology