Third Quarter Iron Ore Market Developments

In a recent note on the iron ore market to clients, Credit Suisse laid out the various pricing mechanisms used by Chinese steel companies and evaluated which are most likely to prove the more popular going forward. Credit Suisse, along with Deutsche Bank pretty much created the iron ore swaps market and are ideally placed to pass judgment on the relative success and popularity of the various pricing mechanisms.

Contrary to the view we can be given that China is a victim of the iron ore producers bully boy tactics, in reality the price mechanisms, if not the actual price adopted is largely defined by the Chinese steel mills themselves. China represents 60% of the seaborne trade in iron ore, some 1 billion tons a year, with some 50% of total Chinese iron ore purchases priced on a spot basis (whereas virtually 100% of Chinese steel is sold on a spot to one-month basis). Consequently the demise of the annual pricing mechanism and the gradual decline of the quarterly pricing mechanism towards spot pricing is very much in line with the mills business requirements.

In recent years, the Australian miners achieved success by gaining a substantial premium for their iron ore on an FOB basis in recognition of the lower shipping costs from Australia against their main competitor Brazil as this chart from Credit Suisse shows:

The degree of separation being in part a reflection of prevailing shipping costs, something Vale is trying to overcome with its recent $1.2bn loan from China to buy 12 very large ore carriers to stabilize and control shipping costs to its primary market, reported last week in LloydsList.

The three principal pricing models being used this year are:

  1. Monthly average shipment at monthly average index this requires a provisional invoice at shipment with an adjusting invoice at month end
  2. Month minus one average to achieve a known price on shipment
  3. Month plus one average for a price more closely aligned to the spot price the mill achieves for its finished steel, this uses the forward iron ore curve CFR China price for 62% Fe for pricing rather than ship on an unknown

Of course iron ore is a naturally occurring product and actual Fe contents vary. The benchmark calls for minimum 62% Fe content with certain humidity and lumps size parameters but grades vary and pricing say 58% Fe content is not a directly linear process from the price of 62%. The impact of lower grades than 62% -1% on productivity is more than the 1% lower Fe content would suggest so without sight of the production cost implications the preceding table of The Steel Index price differentials between 62% and 58% appears illogical but is readily accepted in the industry as appropriate and fair.

The second quarter is expected by Credit Suisse to be the high point in iron ore prices this year with third quarter prices off by about $20 per ton. With the end of the Indian Monsoon period some time this month supply will increase in the fourth quarter and prices are expected to ease further.

–Stuart Burns

What are you seeing in steel markets? Take our very fast and free 4 question MetalMiner Pulse Survey (results released on Friday)



Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to Top