core sector communique

Iron ore spot prices hit new highs

The Steel Index (TSI) daily iron ore reference price for 62% Fe content fines this week hit new highs since publication of its iron ore series began in November 2008. The price recorded today was US$188.90 per dry metric tonne (dmt) CFR Tianjin port in China. 

After falling from its previous high of US$186.50/dmt on 21 April 2010, the price has been on an increasing trend since July last year.

TSI also publishes a 58% Fe content iron ore fines reference price covering lower-grade material. This has also overtaken its April 2010 peak and today hit a new high of US$162.40/dmt.

Prices strengthened through January in the run up to the Lunar New Year and have continued to rise after the holidays. A post-holiday spike is not unusual, but this year it has been bolstered by tight supply from India, Australia and Brazil, the world’s three largest iron ore exporters.

“A new high comes as little surprise given the bullishness we’ve seen in the market over the last six weeks,” notes Rory Macdonald, Head of TSI’s Iron Ore Operations. “That said, there is a feeling in the market that come March prices will begin to soften. There are expectations that the Karnataka ban on exports will be overturned, that restrictions on Brazilian exports caused by bad weather will ease and that Chinese demand will weaken. Looking at the iron ore swaps forward curve, March is priced at $182/dmt, a $7/dmt discount to current spot levels. While prices may fall in due course, however, they are likely to stabilize at higher levels this year than they did last,” he adds.

The iron ore swaps market has grown strongly over the past year as miners, traders and steel mills have increasingly identified the benefits of hedging their forward price risk. More than 2.6 million tonnes with a value of US$470m of iron ore swaps were cleared in January 2011 – a new monthly record. Since their launch at the end of April 2009, a total of over 30 million tonnes (US$4.25 billion) of iron ore contracts have now been cleared.

Over 95% of all iron ore cleared financial contracts are settled against TSI’s reference prices, with the Singapore Exchange (SGX), LCH.Clearnet (London), the CME Group (Chicago), NOS Clearing (Oslo) and Indian Commodity Exchange (ICEX) all settling contracts against TSI’s 62% Fe iron ore index.

TSI prices are also frequently used as the basis for the new, shorter-term index-linked pricing arrangements adopted in contracts between miners and long-term customers. This approach makes the contracts more responsive to spot market prices. In 2010, 3-month pricing terms were typically applied but the speed of spot price movement has been so great that companies are increasingly moving to monthly pricing periods or even spot price arrangements to avoid divergences between contract pricing and the spot market.  

According to industry assessments pre-dating the launch of TSI’s formal indices, absolute record iron ore prices of around US$200/dmt were achieved in February 2008, before the global financial crisis.