Sunday, December 20, 2009

Iron ore price surges to new annual high

The Steel Index (TSI) daily iron ore reference price hit its highest level in 12 months today, reaching US$107.40 per dry metric tonne.  This reference price, for 62% Fe content fines CFRFO China port, represents an 82% increase since March, when the price dipped to US$59.10/dmt. 

The price hit its previous high in August, before falling back sharply to US$76.10/dmt in September. Since then prices have been volatile, with this week alone seeing an increase of 5.2% despite falling freight rates on the key routes into China.

“In my opinion, the levels we’ve seen in the spot market this week are as a result of tightness in supply and continued Chinese demand.  I don’t see the market correcting for a least another week or two,” says Jerry Yu a Hong Kong based trader. “It’s anyone’s guess what 2010 will bring”.

The volatility and rising spot price creates a challenging background for the forthcoming iron ore benchmark price discussions between the Chinese steel mills and miners for next year. At current freight rates, the spot price is some 45-50% higher than the FOB fixed contract price agreed between the Japanese steel mills and Rio Tinto in mid 2009.  No agreement on a benchmark iron ore price was reached with the Chinese steel industry in 2009 and many are skeptical that any agreement is likely for 2010.

Baosteel is representing the Chinese steel mills in next year’s benchmark price negotiations.  Its President, Mr. Ma Guoqiang, was quoted earlier this week as not foreseeing a “large” increase in the benchmark price.  However Macquarie Bank has this week revised its prediction to a 30% increase, while investment banks UBS, JP Morgan and Goldman Sachs JBWere had already predicted a 20% rise prior to this week’s spot price boost.

“In this environment miners, traders and steel mills are increasingly looking to index-based iron ore pricing arrangements, often in parallel with financial swaps to manage their price risk” says Steven Randall, Managing Director of TSI. “The growth in the use of iron ore swaps this year has been nothing short of spectacular. Over US$500m of iron ore swaps have been cleared using TSI’s index over the past 7 months. No other commodity has seen this speed of take-up.”

TSI’s iron ore index is used for settling over-the-counter cleared swaps. The Singapore Exchange and LCH.Clearnet both offer cleared iron ore swaps contracts settling exclusively against the monthly average of TSI’s daily 62% Fe iron ore reference prices published in the expiring month.

About The Steel Index

The Steel Index (TSI) is the premier source of independent, reliable, iron ore and steel price information based on actual transactions.  Iron ore prices are published daily at 12:00 GMT.  Steel prices are published weekly on Mondays.

TSI provides a highly rigorous price discovery service for steel and iron ore prices in major regions around the world.  Price data is submitted confidentially on-line by companies for a range of steel and iron ore products they buy or sell.  Reference prices are then calculated using transparent and verifiable procedures.

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