francis browne, platts - floating prices in the seaborne market

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

Floating prices in the seaborne market

Francis Browne, Editorial Director, Price Group

Global Iron ore & Steel forecast, Perth, 11 March, 2014

Agenda

• Pricing mechanisms

• Trade volume

• Size matters; pellets, lump and premiums

• Methodology update

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Introducing Platts

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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

Pricing mechanisms

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 now use a published base price

• Many LTC’s are now priced monthly with a provisional value before shipment

• Growing portion have migrated to floating prices

• Shorter term pricing has led to better contract performance

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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 – Month QP +2

– Month 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. So called 2-1-2

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• Spot deals on index-linked basis have increased also as participants seek to mitigate price volatility

• Differentials to the published value used as expressions of differences in quality/VIU and timing

• Trend mirrors evolution in other cargo 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 in derivatives 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)

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

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 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)

Trade volume

Spot market activity

Observed trades Jan 13 – Jan14

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2012 delivery

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2013 delivery

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Spot market transactions

• In 2013, Platts observed 475 trades

• 8% of the total seaborne volume China imported that year.

• In line with our view that most spot markets are around 5-10% of delivered volume

• LTC performance is good when there is less price incentive to buy spot.

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Long term average = $130

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2013 Cal14 trade vs spot

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2013 - Cal14 traded average $116.22

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Volume of swaps cleared at SGX

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DCE traded 470 million tons in 6 months

• Open interest in currently 419,000 lots equivalent to 20 million tons

• Pricing tracks offshore movements

• Most active month has moved to September

• Strong correlation with the SHFE rebar contract

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Lump and pellet premiums

Size matters

Lump assessments published in SMD

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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 (market assessed)

• Factored to 65% to give a dmtu value

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Methodology update

Bringing more information and transparency

Launched a low Alumina 58%Fe assessment

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Methodology guide

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Dry bulk freight

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