The numbers coming out of China can appear conflicting.
Daily crude oil imports are up, suggesting increased activity and consumption — but look beneath the surface and we find refined products imports are down. It’s part of a rapid migration to domestic refining rather than importing refined products.
Daily crude steel output is also up; reports say steel mills are benefiting from accelerated infrastructure projects supporting prices. Steel stocks are high, but margins have improved to $30/ton and higher, encouraging steel mills to produce more and leading Baosteel, the market leader, to announce price increases for January.
Iron ore imports are also robust, with the TSI Iron Ore Spot reference price on the rise, accompanied by rising swap trades and growing use of the reference point. But we wondered if the TSI price, like the Platts 62% Iron Ore price that closely matches it, was a leading or a following indicator.
By which we mean, is the market being set in Singapore and China (prices follow the trade), or are the prices being set domestically at the local market level in China and the TSI or wider Asian swaps market follow the local market?
It is more than an academic question. Anyone using the swaps markets would benefit from having a leading indicator to refer to, giving them some indication of the direction of the swaps market in which they were engaged.
Well, it just so happens the MetalMiner IndX℠ tracks ten domestic Chinese iron ore markets, covering Brazilian, Indian and (most importantly for comparison to the swaps markets) Australian 62% iron ore fines.
The following graph is a simplistic comparison of the MetalMiner IndX 62% Australian fines market price in China, compared to both TSI prices and a monthly average of the TSI price.
We have taken TSI prices on days when prices have changed significantly, as we don’t currently track the TSI daily, but for the purposes of the exercise, the graph suggests that the domestic market leads TSI price movements and as such would be a valuable aid to predicting price movements on the swaps market.
The domestic iron ore price jumped from RMB 945 to 975 between Monday and Tuesday of this week — quite a price rise. It would be intriguing to see if the swaps market follows, should the trend persist.
(One day’s price movement is probably too granular to make predictions on; several days or even a week’s trend is probably more reliable.)
But it comes back to the original assertion — what moves markets?
If you can get some visibility early on via correlating indicators, it can be a huge advantage.