© Copyright The Steel Index 2015 /1

TSI Market Watch: Asian Benchmarks July 23, 2015

Raw Materials Swoon as Steel Passes Out: trough worse than GFC nadir.

Executive Summary

Iron ore sees price collapse and recovery.

Coking coal market deterioration continues, again.

Chinese steel demand falters and exports provide no relief.

Derivatives market volumes soar as market races to cover.

TSI’s Asian Benchmark Prices TSI Asian

Benchmarks Price at 22/7/15

All-time High

All-time Low

2013 average

2014 average

2015 TD average

TSI 62% Fe (US$/dry tonne)

$50.7

$191.9

$44.1

$135.18

$96.67

$59.08

TSI FOB Coking Coal (US$/t)

$85.2

$172.0

$83.2

$142.95

$116.55

$98.02

TSI CFR Coking Coal (US$/t)

$89.1

$186.5

$88.7

$160.55

$122.23

$102.29

TSI ASEAN HRC (US$/t)

$316

$758

$316

$578.19

$532.87

$386.20

Rather than ‘pockets of strength’, 2015 has seen only areas of reduced weakness, to date.

Benchmark Prices Beaten Back

Whilst ore’s fall has been deeper than that of coking coal, the acceleration in the

deterioration of the finished steel price over 2015 has been more alarming.

Background Indicators2013

average2014

average2015 TD average

Inputs to ASEAN Margin* $275.2 $312.2 $236.8

CISA average mill profit 0.26% 0.85% ?

*Implied conversion margins of iron ore and CFR coking coal prices to ASEAN-delivered transaction prices. No OPEX or costs other than raw materials are considered

350

400

450

500

550

600

50

60

70

80

90

100

110

120

130

140

150

2013 2014 2015 TD

ASEAN RHS Ore CFR Coal

© Copyright The Steel Index 2015 /2

Iron Ore Prices Astound – To The Downside

Volatility is alive and kicking for iron ore markets. The 8th of July saw the biggest one day

percentage fall since TSI began compiling the index as TSI’s benchmark 62% Fe fines index

collapsed -11.3%. Panic selling was in full swing amid chaotic Chinese equities markets, a looming

threat of a “Grexit”in Europe and on-shore iron ore futures markets hitting ‘limit down’ buffers for

three consecutive sessions. The alarming macro backdrop precipitated the setting of an all-time

low of US$44.10/dry tonne for benchmark 62% iron ore being set.

The key driver for the fall, which the above only served to exacerbate, was primarily plunging

finished steel prices. 85% of Chinese mills were reportedly losing money in June, with mills pouring

close to US$30/t of losses for every tonne produced. This is typically a seasonally weak period,

though the softness of this year proved a surprise, nevertheless. Mills often reduce production to

offset demand weakness, which in turn lowers the overall appetite for iron ore imports.

However, nor has volatility been all one-way. Prices are now back over the fifty dollar mark

(US$50.7/dmt as of July 22nd), although it is notable that this is not the first time this year that

prices have dipped below US$50/dmt. The first and second halves of the year look like different

animals. As 2015 got underway, prices were over US$70/dmt.

Given the levels of volatility seen, it is unsurprising that the financial derivatives markets for iron

ore – both within and outside of China – have been soaring. Volumes of swaps, options and

futures cleared against the TSI 62% Fe iron ore benchmark have been skyrocketing, with a blow-

out 15.7 million tonnes cleared by SGX on the 8th of July: 71% higher than its previous one-day

record, which was, in fact, only the day before. The first six days of July alone had seen volumes

equal to the average of total monthly volumes in 2014.

Iron ore treads a rocky road

A roller-coaster ride for iron ore prices – with 2015 being particularly ‘white knuckle’.

The white (red?) knight of 2008 (Chinese government stimulus) is not expected to

come back, this time.

Sources: China customs

40

60

80

100

120

140

160

180

200There and back again: a miner’s tale

TSI 62% Fe fines, CFR Tianjin

© Copyright The Steel Index 2015 /3

Interestingly, during that period, at least one miner has made public its hedging strategy, which is

a ‘stop-loss’ focused on options. Will the ‘shareholders hold our equities as an unhedged play on

commodity prices’ mantra of producers continue to exercise the same fascination as the

commodity boom fades?

Persistence of Coking Coal Weakness Is Stubborn

The metallurgical coal market has been on a relentless downward grind (with occasional reversals)

since TSI began tracking it. The China-delivered daily spot price is now within forty cents of its all-

time low (US$88.7/t) set in May.

Multiple rounds of cost-cutting by miners have seen per tonne costs successively reduced time

and again, only for transaction prices to fall each time. Nor has respite been given by the

Australian currency weakening against the US dollar. Again, buyers have clawed the currency

‘advantage’ back each time.

The sustained nature of price weakness has encouraged a number of Australian miners to make

production cuts, with Anglo American, Peabody, Xstrata and Teck all making announcements to

that effect, in the run up to the most recent quarterly negotiation.

Australian output pullbacks have happened in a market in which Australian miners were expecting

to take market share from American producers. Instead, they remained surprisingly resilient, at

least until recently.

Ore derivatives growth continues

The 2015 average monthly volumes at SGX are over 70 million tonnes per month,

reaching for 90 million tonnes. July could be the first month of over 100 million tonnes

of trade: given the point it had reached by the 21st (below, July to-date).

Open Interest continues to soar.

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul -

15

TD

Swaps Options Swap Futures Option Futures

SGX Volumes Rampant

© Copyright The Steel Index 2015 /4

It isn’t only the price which has been shrinking, of course. The Chinese import market itself has

been on a sustained negative trajectory for some time, as demand fades year-on-year-on-year and

overcapacity crimps prices.

Indeed, so deep has China’s demand pullback been that it has not been Australia’s ‘number 1’

customer for coking coal for any month since November 2014. Instead, it has languished in third

place behind India and Japan each month bar May 2015, when it reclaimed the number two spot

by pipping India to the tune of 200,000 tonnes.

No end to the pain…

Each coking coal price rally has seemingly been followed by successively new troughs.

China-delivered coking coal has, like iron ore, seen sellers wincing not once, but twice

in 2015. The US$90/t delivered mark has been broached twice so far this year.

85

105

125

145

165

185

Not ‘black gold’, it seems

TSI Premium JM25 Chinese Imports

The incredible shrinking market

Total Chinese imports of metallurgical coal were already retreating in 2014, though this

year has seen it turn into something of a rout.

1,500,000

2,500,000

3,500,000

4,500,000

5,500,000

6,500,000

7,500,000

January February March April May

2013 2014 2015

© Copyright The Steel Index 2015 /5

Those tonnes have had to go elsewhere - primarily to FOB buyers. This resulted in a predictably

sapping effect on prices. The deviation from quarterly settled prices came faster this time than

previously, with spot prices slumping US$9.80/tonne away from the benchmark within nine

working days of contract prices being implemented. With steelmakers’ continued focus on costs,

can this system last much longer given the disparity between spot and benchmark prices?

Index usage has increasingly been focused on TSI’s FOB Australia index for non-China markets. It

has been reported to TSI that material from the world’s top three seaborne miners has been

linked to the index and sources put more than 80% of index-linked FOB tonnage being signed

during 2015 having a link to the TSI benchmark. The pool of data providers contributing to the

index has continued to deepen as steel mills, miners and traders with exposure to the index sign

up to record spot transactions anonymously.

For the period up to July 21st, inbound data of individual transactions submitted have increased by

almost 40% year-on-year.

At the same time, overall volumes submitted to-date have swelled by 36%. TSI used the tonnages

of each cargo, as well as the price achieved to produce a daily volume-weighted average price.

Well over 600 corporations take part in TSI’s indices. For background on the methodology

employed to produce our indices from inbound transaction data, a short video is available here.

Strain evident in ‘quarterly’ system

US$/t prices for spot FOB Australia material have been heavily pressured, falling away

from negotiated settlements quickly and hard, again and again.

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

80

85

90

95

100

105

110

115

120

125

130

Spot Deviation (RHS) TSI Spot PHCC FOB Quarterly Benchmark

© Copyright The Steel Index 2015 /6

For those wishing to hedge exposure, derivatives volumes of CME & SGX combined have increased

by 26% year-on-year over H1 period.

However, as the graph above shows, there is significant basis-risk involved for companies using

different underliers to procure and hedge coking coal price risk, which could prove challenging to

hedge effectiveness and the sustained growth of volumes.

FOB liquidity growth continues

Transactions reported to July 21st have grown 39% year-on-year, whilst volumes have

increased by 36%.

Deals reported

2014 2015

Volume reported

2014 2015

Scales have been removed to protect the anonymity of the data provider pool.

Basis risk is very real

There is real interest in seeing a liquid derivatives market for companies to offset their

coking coal price risk. For entities transacting on an FOB basis the US$/t differential

between the CME and SGX underliers is significant, and volatile.

-4

-2

0

2

4

6

8

SGX FOB underlier Premium/Discount to CME underlier

© Copyright The Steel Index 2015 /7

Asian Steel Markets Falter

TSI’s CFR ASEAN HRC index is an almost perfect proxy (with a correlation of over 99%) for FOB

China HRC prices (unsurprisingly, given that its basis is Chinese-origin SAE1006). It demonstrates

perfectly a prime reason for the swoon in raw materials: plummeting steel prices.

The days of ‘cost-push’ seem remarkably distant. Conversely any ‘demand-pull’ story has been

overwhelmed by supply-growth of finished steel. At the same time, real demand is waning as

construction markets in China remain weak and even hot-spots like Vietnam show signs of cooling.

However, Asia is more than China alone – particularly when it comes to steel production. With

ASEAN being a net importer, producers and traders from around the region deliver steel into

ASEAN, making the index a very usable tool for steel originating from numerous countries.

ASEAN HRC prices overwhelmed

The moves in ASEAN HRC pricing have been sharply downhill since H2, 2014 –

mirroring the increase in Chinese export volumes. Flat product export volumes have

doubled since January 2013.

2

3

4

5

6

7

8

9

10

11

310

360

410

460

510

560

610

660

710

760

CFR ASEAN HRC US$/t Chinese Steel Exports mmt (RHS)

Normalisation values at April 6th, 2015

TSI employ the same methodology for the ASEAN CFR index as we do for all our other indices.

Registered data providers deliver price data to TSI and we normalise this

SS400 – SAE1006 US$8/t

Chinese Mill US$0/t

Chinese (Premium) Mill US$5/t

India US$5/t

S.Korea US$10/t

Taiwan US$10/t

Japan US$11/t

Vietnam US$0/t

Thailand US$8/t

Indonesia US$21/t

Grade variation is not fixed. So TSI adjust dynamically with the market.

Origin Premia are not fixed, so TSI adjust dynamically along with

the market.

TSI make adjustments based on the transactions and bid and

offer data reported into TSI, along with ongoing discussions with

both buy and sell sides as to the prevailing differentials for hot-

rolled coil from these origin points.

Controlled market prices do not conform to stated tariff barrier levels for a

number of reasons, including variable tariffs down the individual mill level,

rather than flat rates. TSI employs the following values to normalise back to a

non-controlled market basis.

© Copyright The Steel Index 2015 /8

Japanese, South Korean or Taiwanese vendors, for example, can link to the ASEAN HRC index,

applying their own premium to it (or those that TSI will shortly begin publishing). Chinese mills can

link directly to it, also.

Nevertheless, whichever origin the hot-rolled coil is coming from – it is achieving the lowest prices

seen since TSI began producing the index. Flows of steel within Asia are huge, but falling prices

prove an impediment to continual flow: something craved by producers. Fixed prices also create

problems for vendors, as in a falling environment, re-negotiations are common, as is the more

troublesome issue of reneging contracts.

It is perhaps that factor which is causing an increase in indexing interest within Asia for finished

steel products, as well as an increase in companies interested in using derivatives to manage that

risk.

Asia remains the only location to have a true regional ‘Virtual Steel Mill’ (or VSM) i.e. the ability to

hedge both raw materials and finished products, both onshore in China, and offshore at SGX. The

need to hedge margins is more acute than ever, but the VSM-aside, for companies involved in the

ferrous trade, TSI’s Asian benchmarks (iron ore, coking coal and ASEAN HRC) are increasingly

important indices to watch.

© Copyright The Steel Index 2015 /9

For further information

Please contact: Tim Hard (Singapore) Coking Coal and ASEAN hard@thesteelindex.com

Jing Zhi Ng (Singapore) Coking Coal jz.ng@thesteelindex.com

Terence Soh (Shanghai) ASEAN t.soh@thesteelindex.com

Oscar Tarneberg (Shanghai) Iron Ore o.tarneberg@thesteelindex.com

Note to Editors:

The Steel Index (TSI) is a leading specialist source of impartial steel, scrap, iron ore and coking coal price

information based on spot market transactions.

Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant

steel, iron ore, scrap, coking coal products. TSI’s index reference prices are then calculated using transparent and

verifiable procedures which are fully aligned with IOSCO principles.

TSI’s iron ore price indices are published daily at 19:00 Singapore/Shanghai time (11:00 GMT) and coking coal price

indices daily at 18:30 Singapore/Shanghai time (10:30 GMT). Steel prices for Northern Europe, Southern Europe and

US HRC are published daily at 14:00 UK time and for ASEAN HRC imports daily at 18:30 Singapore time. Scrap

prices for Turkish imports are published daily at 13:30 UK time. Weekly steel and scrap price indices are published

every Monday and Friday respectively, with each price representing the average transaction price for the previous

calendar week.

TSI’s indices are widely used by steel mills, miners, traders, distributors and manufacturing companies worldwide as

the basis for their physical pricing arrangements. TSI’s indices are also used as the industry standard in the

settlement of ferrous financial contracts.

Singapore Exchange (SGX), LCH.Clearnet (London), CME Group (Chicago), NASDAQ OMX Clearing (Oslo) and

Intercontinental Exchange (ICE) all use TSI’s iron ore index for settling their monthly cleared iron ore financial

contracts. SGX also uses TSI’s coking coal indices and hot rolled coil index for ASEAN imports to settle its coking

coal and Asian HRC steel futures and swap contracts respectively. In addition, TSI’s prices are used for the

settlement of European hot rolled coil steel contracts on LCH.Clearnet and CME Clearing Europe and for the

settlement of Turkish scrap imports contracts on LCH.Clearnet, CME Europe and Borsa Istanbul. In all cases,

settlement prices are the average of TSI’s reference prices published in the expiring month.

TSI is a Platts business, part of McGraw Hill Financial. Further information on TSI, including a free trial of the service,

is available at http://www.thesteelindex.com.

Platts, founded in 1909, is a leading global provider of energy, petrochemicals, metals and agriculture information

and a premier source of benchmark prices for the physical and futures markets. Platts' news, pricing, analytics,

commentary and conferences help customers make better-informed trading and business decisions and help the

markets operate with greater transparency and efficiency. Customers in more than 150 countries benefit from Platts’

coverage of the biofuels, carbon emissions, coal, electricity, oil, natural gas, metals, nuclear power, petrochemical,

shipping and sugar markets. A division of McGraw Hill Financial (NYSE: MHFI), Platts is based in London with more

than 1000 employees in more than 15 offices worldwide. Additional information is available at http://www.platts.com.

This information has been prepared by The Steel Index ("TSI"). Use of the information presented here is at your sole risk, and any content, material and/or data presented or otherwise obtained through your use of the information in this document is at your own discretion and risk and you will be solely responsible for any damage to you personally or your company or organisation or business associates whatsoever which in anyway results from the use, reliance or application of such content material and/or information. Certain data has been obtained from various sources (listed on the final page) and any copyright existing in such data shall remain the property of the source. Except for the foregoing, TSI retains all copyright within this document. The copying or redistribution of any part of this document without the express written authority of TSI is forbidden.