credit suisse_tsi iron ore seminar_oct 08

7/28/2019 Credit Suisse_TSI Iron Ore Seminar_Oct 08

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Iron Ore the new financial market


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Credit Suisse / Glencore Commodity Trading Alliance


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Illiquid Commodity Trading Capability


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1. The natural emergence of a Chinese spot market in

iron ore

China accounts for virtually all of globalgrowth in iron ore demand

Source: BCG

Chinese spot market projected toapproach 500 Mt by 2010


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2. Divergence and volatility

Wide variety of landed product prices

2007 saw high volatility and wide divergence in spot and benchmark prices

Price distortions led players to challenge the pricing mechanism.

Source: Mysteel.net, Credit Suisse estimates

Iron ore prices, C&F China(US$) (Dec-05 to Sept-08)

*China spot: Shandong, higher grade reference.

43

83

123

163

203

243

283

12-05 03-06 06-06 09-06 12-06 03-07 06-07 09-07 12-07 03-08 06-08 09-08

*China Spot - Shandong

India C&F

BZ C&F

OZ C&F

China Spot


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Iron ore spot market in China meets most prerequisitesfor a liquid physical and financial market

StartedStandardized grade, quality and delivery of

commodityStandardization

Strong interestParticipation of physical merchants and othersIntermediary participation

H2 08Established price index by reputable provider

that servers as a reference for tradesReliable price index

Exists China spot

market

Market not concentrated with a few big

producers or dealersFragmentation

ExistsHigh price volatility to encourage

hedging/proprietary tradingPrice volatility

Exists

Notional trading volume should exceed a

minimum threshold ($3-10B) to interest financial

players

Large market size

Est. TimingDescriptionSuccess factor

Source: BCG


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Evolution

Source: BCG

Trend for fixed pricedcommodities to break down to

more 'market based' pricing

Shift from fixed to spot pricing

accompanied by greater

volatility

Single reference productemerges as the pricing

standard to simplify trades

I. Rise of spot sales

Development of financial market usuallyfollows physical spot, driven by a volatile

spot market

Intermediaries enter to facilitate

transactions

As a liquid financial forward/futures

market develops, larger suite of exotic

instruments developed by investmentbanks, e.g. options, swaps

II. Supported by financial

markets

Vibrant spot and financial marketfurther encourage adjacent

markets to develop both

upstream and downstream

III. Development of

adjacent markets


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Potential iron ore market evolution

Q2 2008 Q4 2008 2009-10 2011-12

Source: BCG


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Much progress has been made

Exchange

traded

products

Market

making with i-

banks

No providers were planning to launch a

robust IO index

IO standard spec did not existRobust index

Intermediary

participation

No active market makers

No paper market and IO limited to

physical trades

No IO contract listed

Standard contract did not exist

Traders and brokers limited to

dealing with physical spot tradesfrom India

Three publishing houses launch detailed IO

indices

IO standard spec published

Two i-banks offer OTC swaps and market-

make

Forward curves published on Bloomberg

At least one exchange considering a clearing

mechanism for iron ore otc swaps

Developed initial version of std. contract

Willingness to report physical trades to index

Interest in paper market

Prior to Dec 2007 Today (Sep 2008)

Robust index launch likely to attract more participants and increase financial market activity

Source: BCG


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Iron Ore indices from journalistic to reference indices

Fri 12:00 LondonDaily 09:00 SingaporeFri 08:00 LondonPublication

WeeklyDailyWeeklyData collection

Loading with 4 weeks4-8 weeks from publicationWithin 8 weeksDelivery period

TianjinQingdaoQingdao-Lizhao-Lianyungang

Delivery port

20kt min parcel35kt min parcel30-350ktTrade size

up to 10.0mm for up to 90%up to 10.0mm for up to 90%>90%


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How much volume has traded?

0

1

2

3

4

5Other

Private Banks

Pension Funds

Hedge FundsPhysical Merchants

Steel Mills

Producers

Mt

Source: BCG


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What do you trade?

Fixed Rate Swap Linked to Iron Ore

Description

Credit Suisse pays/buys Iron Ore at a fixed price based on a notional volume of iron ore for a given

period Client pays the floating Iron Ore reference price over the same period

The floating (reference) price: Iron Ore Fines, cfr China - unweighted arithmetic average of the monthlyiron ore prices stated in USD per metric tonne published by:

Metal Bulletin (MBFOFO01 Index) under the heading World Steel: China: China Import: cfr mainChina Port, $/tonne: Iron ore fines

Steel Business Briefing (SBBSCIIO Index) under the heading Steel Prices: Steel Raw MaterialsPrices: China import: Indian Iron Ore 63% Fe dry - CFR N.China port $/t

Bloomberg ticker MBFOFO01 and SBBSCIIO )

Settlement occurs monthly and the swaps are financially settled - there is nophysical delivery of ironore, just a net payment of cash (i.e. the difference between the fixed and floating price)


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CS Iron Ore Forward Curve


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So what now?

1. Price correction now leading in inquiries

Source: Mysteel.net, Credit Suisse estimates

Iron ore prices, C&F China(US$) (Dec-05 to Sept-08)

*China spot: Shandong, higher grade reference.

43

83

123

163

203

243

283

12-05 03-06 06-06 09-06 12-06 03-07 06-07 09-07 12-07 03-08 06-08 09-08

*China Spot - Shandong

India C&F

BZ C&F

OZ C&F

China Spot


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Price correction has encouraged two-way interest

Estimated Iron Ore Cash Costs for 2009US$/ton

Source: FMG, Credit Suisse estimates

Labour Fuel Electricity Supplies Maintenance Transport Royalty Port Loading

ChineseMarginal

Prod.

0

10

20

30

40

50

60

70

100

0 150 200 900800700600500400300

Kumba

CSN

Vale

FMG

RioTinto

BHPBillition

FerromineraOrinoco

NMDC

ValePellets

ClevelandCliffs

RioTintoPellets

LKABPellets

MarginalIndianSpot


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esearc oo s or ro us , vo a e ou oo , over nexyears

Tight markets will keep iron ore prices high in 2009-12. Pricing mechanisms will support higher prices: index or a revived benchmark system

Having moved into greenfield with higher capex levels, projects may require US$50/t to

fly.

Source: TEX, Credit Suisse estimates

Iron ore price curve Carajs fines benchmark to Europe

(USDc/Fe Unit)

0

20

40

60

80

100

120

140

160

180

200

Curve 84.70 139.75 167.70 176.08 176.08 176.08 132.06 105.65 86.63

US$/t 52.77 87.08 104.5 109.7 109.7 109.7 82.29 65.83 53.98

71% 20% 5% 0% 0% -25% -20% -18%

SFC to EUR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


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Whats next? Creating a synthetic FOB Benchmark

Source: Credit Suisse Research, Bloomberg

Use readily available China CFRspot Iron Ore Fines data;

China Import Indian Iron Ore 63%Fe (CFR China)

Quoted on Bloomberg -SBBSCIIO , MBFOFO01

Remove freight component viaobservable spot ocean freight

rates; C3: Tubarao (Brazil) ->Beilun/Baoshan (China) viaCapesize

C5: Western Australia ->Beilun/Baoshan (China) via

Capesize


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credit suisse_tsi iron ore seminar_oct 08

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