Iron ore spot market price assessment evolution

Francis Browne, Price Group | 6th November, 2012

Informa 5th Americas iron ore

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Assessment evolution

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Global hot metal/pig iron production

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Chinese iron ore imports

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Term and spot markets

Spot

Term

Spot markets are typically 5 to 10% of the overall market by volume

Performance issues collapse price

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Periods of satiability and range pricing

Price collapses quickly as cancelled term cargoes enter the spot market

Delivery into the spot market

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IODEX has a volatile history

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IODEX and 65% Fe

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The differential has decreased

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Relationship with Fe differential

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Quality differentials tend to (de)escalate

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IODEX correlates with Chinese steel prices

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Met Coal

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58%Fe differential to IODEX 62 has also decreased

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Contract pricing

All pricing is basis China

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Pricing evolves in long term contracts

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• Calculation is not universal

• October 2012 monthly averages

• October 2011 monthly averages

– IODEX = 115.55 dmtu basis = 5.59 (7.30)

– 65% Fe = 123.08 65 v IODEX = 7.53 (16.30)

– 1%Fe diff = 2.29 x3 diff = 6.89 (14.25)

VIU quality adjustments

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We were keen to offer the market a pellet assessment which reflects a provisional value for the month/quarter ahead.

Basis IODEX netback to Brazil

+ a quality adjustment to basis 65% Fe

+ a premium

Rebased to a dmtu value - FOB

Pellet premium – provisional pricing

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• An increasing number of contracts are now being priced off ‘floating’ prices

• The contract price is settled against an index value either at loading or discharge

• The final value tends to include a delta (+/-) to adjust for quality, market, location and time.

Floating prices

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• After Fe content most of the differential is focused on Silica and Alumina content

• Silica penalty changes depending on Chinese domestic mining production

• Australian high LOI ores

• Shipment time – delivery is becoming key

• Volume and discounts

• Market structure

About the delta

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Forward curve

The market is moving fast

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Iron ore swaps 350 million tons

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abr/09 jul/09 out/09 jan/10 abr/10 jul/10 out/10 jan/11 abr/11 jul/11 out/11 jan/12 abr/12 jul/12

OTC SGX LCH CME SMX

• Miners are naturally long and Steel mills naturally short• Hedge funds and banks providing liquidity as the spot market is

volatile• Iron ore has become a leading macro economic indicator• Traders are using that liquidity to mitigate risk

IODEX and the forward curve

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IODEX vs Front month swaps

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http://www.platts.com/newsfeature/2012/metals/plattsironore/index

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Trade Data

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10

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60

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May* June July August Sept

Platts

GlobalORE

CMBX

Benchmarks evolve with greater transparency, standards

Initial Stage

Tracking direct trade

Phone surveys

Standardization of practices

Assessments daily

Market education process

Assessment windows

Participants named

Firm, open bids/offers

Price formation in real time

eWindows

Intermediate

Price range narrows

Trade becomes more dynamic

Market activity in real time

Transparency evolves

Advanced

Price Discovery – Market on Close (MOC)

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OffersOffers

BidsBids

Value is time-stampedCut-off for new bids/offers

DealsDeals

eWindows – arriving in 2013

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Thank you

francis_browne@platts.com