UTC+8 ( BJT)

BLOG: Seaborne iron ore price conquers $200/dmt CFR

ABSTRACT

The benefit of covering the ferrous market news for long especially being very close to the happenings in the iron ore market when working in the world’s three pricing reporting agencies (PRAs) is to immediately know that the 62% iron ore pricing index hit a historical high on May 6 when it exceeded $200/dmt CFR China, without even bothering to check the data.

The soaring pricing index both for May 6 and then another step-up on May 7 was both surprising and not to me, as after all, rather robust steel demand not only in China, the largest iron ore consumption country, but also the rest of the world, and on the other hand, the highly-concentrated iron ore supply structure, together with all the financial elements in the top steelmaking raw material, have all made the spike rather acceptable to some extent.

“Iron ore price has gone through from being crazy to insane, but weirdly, it seems to be making sense with all the crazily surges in steel prices, such as HRC worldwide, no one can predict where this will go,” a Beijing-based steel analyst said.

“Nowadays, predicting iron ore prices is almost impossible and far more complicated, as it is no longer just about demand and supply in the physical market, and I need to check out political, macro-economic, and financial news, and not only about China, I also keep to keep an eye on the global oil price, the U.S. interest rates, and even gold prices, as it is no longer as straightforward as before,” a Singapore-bases iron ore analyst sighed.

He admitted that chances are higher nowadays for him to predict the iron ore price trend wrong, “Sometimes the fundamentals appear rather solid, yet iron ore pricing index falls, while when demand seems not as promising, yet the index jumps $4-5/dmt a day simply because a couple of deals are done or the derivatives market has had some speculative trading for some reason,” he said, shrugging.(Is now sky the limit for steel and iron ore prices? Or is a downpour about to come?)

The iron ore market has never failed to amaze me since day one when I joined the industrial news journalism in 2004, and may I say that most of the changes in the many years have been rather challenging to a journalist.

When I felt it rather frustrating to dig out some information about the annual pricing negotiations because it was held closed-door before 2009, the varied attempts among the mills and the iron ore miners in new pricing schemes to find a solution that best suited their needs starting 2009 when the annual pricing mechanism came to an end was even more chaotic.

The testing of different pricing models also triggered the development of iron ore pricing index sometime in 2008 by the few global PRAs, as spot deals had been growing in portion, and back then Indian iron ore pricing index was the focus.

Soon afterwards, the 62% Fe content iron ore pricing assessments have taken the centre of the stage, which mainly refer to the iron ore supplies from Australia via spot deals, partly as the Indian authority had tightened its control over iron ore exports mainly via export tax adjustments, intending to hold all the higher-grade iron ore such as 63% and 63.5% ferrous content ore within the country for its own steel capacity expansion in the future, and India, as a result, ceased being China’s third largest iron ore importer. 

The add-on of the pricing index into this bulk commodity that used to be only about the physical market with the majority of supplies in long-term deals has led to the emergency of the derivatives products, with Singapore Exchange being the first to launch iron ore swaps on April 27 2009, and, thereafter, the financial element has been added into the iron ore market, making the price assessments even harder now that the fundamentals are no longer the only factor under consideration.

On top of all these, the Dalian Commodity Exchange launched its iron ore futures on October 18 2013, and the iron ore derivatives both in the Chinese Yuan and the U.S Dollar have further driven more funds into the market, and nowadays, more seaborne deals are sold via spot deals, and more industrial sources including steel mills and traders have adopted the derivatives as the hedging tools against the pricing risks in the physical market, further magnifying the financial characteristics of the steelmaking raw material.

With the global ferrous market evolving into more carbon emission conscious, especially in China, the iron ore market will be experiencing some fundamental changes, and the only thing certain is the uncertainty, and journalists, watch out!

Written by Hongmei Li, li.hongmei@mysteel.com