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Events
Stable index, volatile brands: the next chapter in
iron ore pricingChanges and challenges ahead for the pricing system
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• Argus is the world’s largest privately owned PRA, with a team of 850
from 21 global offices
• 11,000+ daily price assessments
• IOSCO compliant methodology
Also offers…
• Market intelligence for world commodities markets
• Bespoke consulting services and training.
• Conferences and forums
Global, Market-focused, Independent
Copyright © 2017 Argus Media Ltd. All rights reserved.
Coverage includes:
• Energy
• Fertilizers
• Petrochemicals
• Global metals
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3
• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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4
• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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5
• Benchmark iron ore prices have been remarkably stable in 2018
• The middle two quarters saw prices in $60-70 range
• Albeit, volatility has returned in recent weeks…
2018: The (iron ore) year in review
Copyright © 2017 Argus Media Ltd. All rights reserved.
$30
$40
$50
$60
$70
$80
$90
$100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Argus ICX 62% iron ore index
2018
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6
• Benchmark iron ore prices have been remarkably stable in 2018
• The middle two quarters saw prices in $60-70 range
• Albeit, volatility has returned in recent weeks…
2018: The (iron ore) year in review
Copyright © 2017 Argus Media Ltd. All rights reserved.
$30
$40
$50
$60
$70
$80
$90
$100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Argus ICX 62% iron ore index
2017 2018
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• Benchmark iron ore prices have been remarkably stable in 2018
• The middle two quarters saw prices in $60-70 range
• Albeit, volatility has returned in recent weeks…
2018: The (iron ore) year in review
Copyright © 2017 Argus Media Ltd. All rights reserved.
$30
$40
$50
$60
$70
$80
$90
$100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Argus ICX 62% iron ore index
2016 2017 2018
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8
$50
$55
$60
$65
$70
$75
$80
$85Argus ICX 62pc iron ore index
• Benchmark iron ore prices have been remarkably rangebound in 2018
• The middle two quarters saw prices in $60-70 range
• Albeit, volatility has returned in recent weeks…
2018: The (iron ore) year in review
Copyright © 2017 Argus Media Ltd. All rights reserved.
$17.75/dmt
2018
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• Healthy steelmaking margins have been the norm…for most of this year
• Leading Chinese mills to focus on productivity
2018: The (iron ore) year in review
Copyright © 2017 Argus Media Ltd. All rights reserved.
$0
$50
$100
$150
$200
$250
$300
$350
$400
$300
$350
$400
$450
$500
$550
$600
$650
Chinese steel prices & implied furnace spread
Implied BF spread Rebar (FOB China) HRC (FOB China)
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China policy drives buying habits
Copyright © 2017 Argus Media Ltd. All rights reserved.
• Policy, particularly relating to tougher environmental restrictions, has
also shaped buying behavior for iron ore.
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This has supported demand for premium ores
Copyright © 2017 Argus Media Ltd. All rights reserved.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
$0
$20
$40
$60
$80
$100
$120
02
-Jan
-20
15
02
-Mar
-20
15
02
-May
-20
15
02
-Ju
l-2
01
5
02
-Sep
-20
15
02
-No
v-2
015
02
-Jan
-20
16
02
-Mar
-20
16
02
-May
-20
16
02
-Ju
l-2
01
6
02
-Sep
-20
16
02
-No
v-2
016
02
-Jan
-20
17
02
-Mar
-20
17
02
-May
-20
17
02
-Ju
l-2
01
7
02
-Sep
-20
17
02
-No
v-2
017
02
-Jan
-20
18
02
-Mar
-20
18
02
-May
-20
18
02
-Ju
l-2
01
8
02
-Sep
-20
18
02
-No
v-2
018
Argus 65% vs. 62% index
% Premium for 65
Iron ore fines 62% Fe (ICX) cfr Qingdao prompt, Singapore close, midpoint, USD/dmt, cfr
Iron ore fines 65% Fe cfr Qingdao prompt, Singapore close, midpoint, USD/dmt, cfr
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This has supported demand for premium ores
Copyright © 2017 Argus Media Ltd. All rights reserved.
0
5
10
15
20
25
30
35
40
03
-Jan
-20
18
03
-Feb
-20
18
03
-Mar
-20
18
03
-Ap
r-2
01
8
03
-May
-20
18
03
-Ju
n-2
01
8
03
-Ju
l-2
01
8
03
-Au
g-2
01
8
03
-Sep
-20
18
03
-Oct
-20
18
03
-No
v-2
018
c/d
mtu
Argus ICX Lump Premium
$80
$90
$100
$110
$120
$130
$140
$150
$160
11
-No
v-1
7
31
-Dec
-17
19
-Feb
-18
10
-Ap
r-1
8
30
-May
-18
19
-Ju
l-1
8
7-S
ep-1
8
27
-Oct
-18
16
-Dec
-18
64% Fe, 3% Al Pellet trades (2018)
• Direct charge ores benefited from pollution control measures
• Pellet prices easing on less stringent than expected pollution controls
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But it has also pulled apart the core of the 62pc index…
Copyright © 2017 Argus Media Ltd. All rights reserved.
-15.00
-10.00
-5.00
0.00
+5.00
+10.00
Brands vs. Argus ICX (62pc Fe basis)
BRBF62 diff to ICX, USD/dmt, cfr JMBF62 diff to ICX, USD/dmt, cfr
MACF62 diff to ICX, USD/dmt, cfr NHGF62 diff to ICX, USD/dmt, cfr
PBF62 diff to ICX, USD/dmt, cfr
• Wider quality spreads not only between 62%, 65% and 58%
• Spreads now wider between the products making up the indices
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• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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The inputs into the 62% Fe index are diverse
Copyright © 2017 Argus Media Ltd. All rights reserved.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
10
20
30
40
50
60
70
Nu
mb
er
of
de
als
Transactions underpinning Argus ICX 62pc index
BRBF PBF NHGF
MACF JMBF SFLA
RTX PBF Share (%) - RHS
• The 62% index has served as a
successful reference for nearly
a decade
• Multiple inputs allow sharing
of risk and responsibility of
index creation
• An index dilutes the pricing
power of any single actor
• The 62% Fe reference is
matched with a liquid hedging
mechanism (e.g. SGX)
The challenge being posed to the
62% index is from volatility in
the component brands
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• Indices can be generated from other data, such as bids and offers, but
transactions are core
• As well as low liquidity, there is limited diversity in inputs
Compared with 62% indices, the others are illiquid
Copyright © 2017 Argus Media Ltd. All rights reserved.
0
2
4
6
8
10
12
14
16
Transactions underpinning the 65% Index
IOCJ
0
2
4
6
8
10
12
14
Transactions underpinning the 58% Index
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• The futures markets have allowed risk management, and enabled use
floating prices in indices
Futures market around 62pc is shrinking
Copyright © 2017 Argus Media Ltd. All rights reserved.
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
Jul-
17
Oct
-17
Jan
-18
Ap
r-1
8
Jul-
18
Oct
-18
Iron Ore Derivatives: Growth and volume
Year-on-year change Volume
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• The use of floating price deals in the index is only possible with a liquid
futures curve
The use of floating prices in the 62pc index has become critical
Copyright © 2017 Argus Media Ltd. All rights reserved.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
62pc Spot Trade
Fixed Price Floating Price
Just 21% of deals were fixed price in October
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• Wider brand spreads have led to new 62% indices for subsets of
this market.
◦ Some split the 62% Fe market by origin and product
◦ Each brand assessed based on its own data pool
◦ Reduction of liquidity
◦ Concentration of pricing power
• Pricing increasingly moving towards an “oil” model (end of day
pricing).
Recent developments risk accelerating fragmentation
Copyright © 2017 Argus Media Ltd. All rights reserved.
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• As the index concept comes under pressure, the
industry is also looking afresh at the best index to use
• The buy side in China, via CISA, has requested a
“basket” approach: sellers are looking at new options
• This puts further strain on the physical financial link
• At the center are questions around methodology
Basket pricing: a methodology hedge?
Copyright © 2017 Argus Media Ltd. All rights reserved.
End-of-day methodology• Priority of data based
on timing• Bypasses current
trading channels• Individual company
responsibility• Named participation
Volume-weighted average• Priority of data based
on quality and volume• Supportive of existing
ecosystem
?
Index Methodology?
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• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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• Stable index, volatile brands
• Under pressure: the 62% Fe benchmark
• The Argus approach to iron ore
Agenda
Copyright © 2017 Argus Media Ltd. All rights reserved.
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Argus ICX62pc index: Evolved and ready for use
Copyright © 2017 Argus Media Ltd. All rights reserved.
ICX
International Price Reporting Agency with size and scale
Organisation-Wide Compliance Framework
Stable Team: average of 5 years of ore experience
Benchmark Administration Experience (Paper/Phys)
Methodology Tailored to the Iron Ore Sector
All Day Volume-Weighted Average, maximising data
Seaborne and Portside iron ore indices
Daily published rationale
Input transparency
Monthly Audit
Systemic incorporation of floating price trades
Time normalisation of trades to the same point in time
Forward Curve Integration
Open Sourcing of data: trade data prioritised, not venue
Increasing frequency of trade data availability
Intraday pricing started: seaborne, portside and indicators
• Extensive evolutions since
September 2017 are aimed at
establishing a market-leading
alternative:
◦ The most experienced team of any PRA
at managing iron ore benchmarks – both
financial and physical.
◦ Bespoke iron ore methodology tailored to
needs of 2018 and beyond
◦ Volume-weighted average methodology
combined with IOSCO data hierarchy
◦ Integration of index-linked pricing and
futures markets
◦ Expansion of port stock coverage
◦ Daily lump pricing
◦ Intra-day updates
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• Collection of the broadest possible set of
verifiable data.
• Processing this data in a consistent,
explicable process to produce the final
price.
• Volume-weighted average with data
hierarchy matching IOSCO principles
The Argus ICX™62pc Iron Ore Index: Methodology Principles
Normalised
to ICX
Spot transactions
reported by market
Screened
for outliers
Volume-
weighted
average
Index
E-Platform trades
Bilateral trades (100%)
Floating trades
bids/offers (50%)
Platform
Bid/Offer
(20%)
Trade data
(bids and offers)
and indicative levels (5%)
Fall-back
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ICX™62pc: binding the off-shore ecosystem
Copyright © 2017 Argus Media Ltd. All rights reserved.
• The ICX ecosystem would
look familiar
• ICX seeks to bind the
existing architecture
• Financial and physical
markets connected via
floating trade and timing
• This sets a predictable
seaborne environment for
the medium term
Trading Screen
Floating Trade
Futures
ICX
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Action Screen TRADE:Paid
Trade Date and Time 01-Nov-18 17:30:32
PRODUCT NF gO 62% Fines CFR-QD (STD Index)
QUANTITY(WMT) 90kt
DELIVERY SLC 1-10 Dec 2018
Notional Arrival Period(s) Dec'18
PRICE
Index INDEX Argus 62%
Discount to Index 0.00
Quotational Period 1 - 31 Dec 2018
Premium +US$1.90/mt
INDICATIVE NON-BINDING INFOBuyer shall ensure that the L/C is issued and received by Seller no later than 7 days prior to the start of the SLC. Upon or after Seller-s receipt of an acceptable L/C, Seller will submit to Buyer for Buyer's approval a vessel nomination notice. The L/C value shall be determined using a provisional quotation period equating to the average of the iron ore prices published by the Pricing Index for the first 20 days of the month prior to the start of SLC date.
Argus ICX seeing usage
Copyright © 2017 Argus Media Ltd. All rights reserved.
• BHP sold Newman Fines basis the Argus index on 1 November
• Argus ICX62pc index attracting more attention from buy and sell side
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• Brand prices launched last week;
history back to December 2017
• The brands are published as a
relativity to the ICX 62% Fe index,
along with outrights for reference.
• They are calculated using the same
published differentials (ViM) that
are used to normalize deals to the
index
Argus launched quality-driven brand prices in October
Copyright © 2017 Argus Media Ltd. All rights reserved.
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29
• Each brand index is underpinned by the same data as the wider index
• Using market-informed quality adjustments avoids problem of illiquidity
for specific brands
How are brand prices arrived at?
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• Despite rangebound benchmark (62% Fe), there has been a surge of volatility in the inputs to that benchmark.
• The 62% index is relatively liquid and diverse, compared with others.
• However, the 62% Fe index is being fragmented into sub-indices, as wider spreads pull in different directions.
• At the same time the industry is requesting a basket, and 62% futures volumes are falling.
• Argus has reengineered its 62% Fe index with a view to addressing:
◦ Interbrand volatility
◦ The continuation of a liquid 62% Fe index
◦ Supporting a sustainable off-shore pricing system for iron ore
• Index is now seeing increased usage
Conclusions and summary
Copyright © 2017 Argus Media Ltd. All rights reserved.
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Copyright © 2015 Argus Media Ltd. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its
licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its
contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus.
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