Wednesday, October 26, 2011

TSI iron ore index sees sharpest fall since launch
London. 26 October 2011

Iron ore markets have dropped precipitously over the last month, with The Steel Index (TSI)’s 62% Fe grade slumping -23.7% over a four week period, from US$172.6/dry tonne (dmt), to US$131.70/dmt on 25 October 2011.

The market is now favouring buyers of iron ore, with miners’ offers being met by mill bids which are often described as ‘unreasonable’. TSI’s 62% index fell by US$10.2/dmt yesterday, its largest one-day fall since the index was launched in October 2008. Worries over the global economy, weak economic sentiment and Chinese credit tightening measures are behind recent softness.

More than that, Chinese steel price weakness has pushed the iron ore market steeply lower. Steel Business Briefing, a sister organisation to TSI, notes that ‘at least 2.6mt of crude steel mill output reductions have been announced to take place in Q4’.

Over this period, however, trading of iron ore swaps has ballooned. Whilst August saw over 6.6million tonnes traded, with a nominal value of over US$1 billion being cleared, individual days in October have seen in excess of 750,000 tonnes cleared through Singapore Exchange (SGX) alone (basis TSI’s figure).

“Turmoil in the iron ore markets has really proved the efficacy of hedging iron ore – we’ve seen numerous occasions where buyers of the product who have bought forward on the paper market secured a better price than if they had remained solely in the spot market. On this occasion, sellers of iron ore who have hedged positions in August/September will be able to take a more sanguine view of recent volatility” says Tim Hard, Director at TSI.

Volatility is not confined to the iron ore market, however, other steelmaking raw materials such as steel scrap prices and coking coal have also fallen away. Global hot-rolled coil prices (a key finished steel product) have been experiencing attrition since February.

“One item to note is that marginal producers of iron ore are being squeezed out of the market as we’ve retreated from US$170/dmt towards the US$130/dmt price level, which alters the supply outlook in a market experiencing structural tightness. At a certain point, assuming demand does not fall away significantly, a price response will emerge”, adds Tim Hard.

Since their launch, more than 55 million tonnes of iron ore financial contracts have been cleared basis TSI, with a nominal value of over US$8.6 billion. This represents over 95% of all iron ore contracts cleared during the past 2 years.


The Steel Index (TSI), a Platts business, part of the McGraw Hill Companies, is a leading specialist source of independent iron ore, steel and scrap price information based on actual transactions. TSI is also currently developing coking coal reference prices.

Iron ore price indices are published daily at 12:00 GMT. Daily steel price indices are published at 14:00 UK time and daily scrap prices are published 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.

Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant iron ore, scrap and steel products. TSI’s index reference prices are then calculated using transparent and verifiable procedures.

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), NOS Clearing (Oslo) and Indian Commodity Exchange (ICEX) all use TSI’s iron ore index for settling their monthly cleared iron ore financial contracts. LCH.Clearnet also uses TSI’s prices for the settlement of two European hot rolled coil steel swap contracts and its Turkish imports scrap contract. In all cases, settlement prices are the average of TSI’s reference prices published in the expiring month.

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