FOCUS: The rising importance of portside iron ore trading in China

Shorter lead times, smaller volumes and less onerous financing arrangements have seen portside iron ore trading grow in popularity over the past three-to-four years.

Portside iron ore prices in China have largely remained at a discount to seaborne levels so far this year amid a slowdown in construction activity and high stock levels.

According to estimates from a local information provider in China, stocks at major ports in the country were around 158.62 million tonnes on Wednesday March 7, up from roughly 146 million tonnes at the start of the year.

This marks a change from October to mid-December, when portside prices consistently exceeded seaborne levels.

The relationship between seaborne and portside iron ore prices has become a significant gauge of the outlook for the iron ore market, with seaborne cargoes typically having a lead time of 30-60 days from the time of booking to arrival at Chinese plants, while port cargoes are usually delivered within days of payment.

The differential between the Metal Bulletin 62% Fe Iron Ore Index (MBIOI-62) and the Metal Bulletin China Ports Stocks Index (MBIOI-CPS) is akin to a physical forward curve, on which stakeholders often base their buying and selling decisions.

Development of portside iron ore trading
The growth in portside iron ore trading reflects China’s rising status as a steel producer. The country’s crude steel output increased to 832 million tonnes in 2017 from 779 million tonnes in 2013  

In tandem with this growth in steel output, domestic iron ore imports soared to 1.075 billion tonnes, up from from 819.4 million tonnes in the same comparison.  

The growth in import volumes pushed stockpiles at major Chinese ports above 100 million tonnes in 2014. In the same year, Metal Bulletin launched the MBIOI-CPS to provide a gauge of the level at which imported iron ore traded at Chinese ports.

The daily yuan-denominated index takes into account 17% value-added tax, port fees and a moisture conversion from dry metric tonnes (dmt) to wet metric tonnes (wmt).

Metal Bulletin also publishes a US dollar-denominated per dmt conversion of the MBIOI-CPS accounting for these factors.

Port stocks in China comprise various grades of iron ore; the MBIOI-CPS reflects trades of products that fall within the 56-66% Fe specification range.

The iron and gangue specifications of the MBIOI-CPS and MBIOI-62 seaborne index are identical, to facilitate a like-for-like comparison.

Mainstream brands such as Pilbara Blend, Newman, Carajas Iron Ore (IOCJ), Brazilian Blend Fines, Fortescue Blend and Super Special Fines are among those most frequently traded at China’s sea ports.

“The MBIOI-CPS methodology is almost exactly the same as Metal Bulletin’s seaborne iron ore indices – the only difference is the lack of separate sub-indices for data reported by producers, consumers or traders,” according to Metal Bulletin index manager Peter Hannah.

“Many participants in the portside market fluidly switch between buying and selling roles, making the sub-index split less relevant when compared with a more regularly structured market,” he said.

“The MBIOI-CPS is an objective, transaction-driven calculation. Although the index is based to Qingdao port to maximize comparability with the seaborne price, data from nine major ports is normalized to Qingdao using statistical relationship coefficients that are updated monthly,” he added.

More than 60 separate companies contribute price data to the index, reflecting a highly liquid port market, Hannah said.

For the full Metal Bulletin Iron Ore Index methodology, click here.



Drivers of iron ore trading at Chinese ports
The fact that port stocks have been at a level around 150 million tonnes in recent months reflects their trading significance.

The initial boost to portside iron ore trading came in 2014-15 when steel mills and traders incurred heavy losses because of a weak ferrous market. This prompted some mills to turn to port sourcing to reduce exposure to seaborne cargoes that were typically sold in larger lot sizes and hence required massive credit lines.

The bottoming-out of the ferrous market toward the end of 2015 continued to support portside trading via the entrance of new participants. The lower credit line requirements and lack of a need to fulfil formalities around meeting import criteria encouraged these new participants to become active in trading iron ore at ports.

A proportion of the port iron ore inventories are temporary stocks stored by mills before they are transported to their facilities for consumption. A growing volume, though, is kept for trading, including by steel mills that sometimes resell their stocks to take advantage of higher prices.

Crucial in making port stocks attractive to some buyers is the smaller lots in which they are sold. While seaborne cargoes are usually sold in Capesize or half-Cape shipments of 70,000-240,000 tonnes, portside material is sold in more flexible lot sizes and may be as small as 2,000-5,000 tonnes.

The other attraction for mill buyers is access to wide grades of iron ore with a smaller lead time, allowing coastal steelmills to keep their onsite inventories at a minimum and to restock only on an as-needed basis.

Port trading also provides traders with the opportunity to maximize profits by basing their buying and selling decisions on the gap between port and seaborne prices.

For example, seaborne offers may be withdrawn to encourage sales of port cargoes if they are fetching a higher price at a given time. This was evident in the second half of 2017, when port prices regularly exceeded seaborne levels.

Ports also serve as an additional point of sale for traders should their seaborne cargoes fail to find a buyer.

To cater to the Chinese market’s needs, even global miners have stepped up portside trading. Brazilian miner Vale has established ore blending facilities at a series of seaports along China’s coastline in the past few years, selling its Brazilian Blend fines on a yuan basis in flexible tonnages to steelmakers.

Factors that affect port prices
Iron ore trading on the Dalian Commodity Exchange (DCE) has a significant effect on portside prices.

The physically deliverable contract, which was introduced in October 2013, is used both for hedging and for speculation by Chinese market participants.  Volatility in the contract’s movements is often captured in portside offer and bid levels throughout the day; traders often buy and sell port cargoes based on their DCE positions.

China’s plans to open up its iron ore market to foreign investors should increase the influence that the exchange’s contract has on iron ore prices globally, and in turn on port trading.

In fundamental terms, the port and seaborne prices for the same iron ore products have historically largely tracked each other’s movements, with the price gap seldom exceeding $2 per tonne.

Since mid-December 2017, Metal Bulletin’s implied US-dollar 62% Fe China port price has stayed below the Metal Bulletin 62% Fe Iron Ore Index, reflecting ample port cargo availability, according to market sources.

The appreciation of yuan against the US dollar from around 6.60 yuan to $1 in mid-December to around 6.30 yuan to $1 since late in January has also pushed seaborne prices higher, they added.

In February, Metal Bulletin’s US dollar-implied port stocks index stood at a maximum discount of $3.18 per tonne to the 62% Fe iron ore index.

And in recent weeks, uncertainty over Chinese policies for the rest of the year, related to restrictions on steelmaking, have capped trading activity.

Policy decisions on further steel production cuts in China are expected once the the National People’s Congress, and the Chinese People’s Political Consultative Conference that convened on March 5, conclude later this month.

But whether any decisions there will have any effect on the growth of portside iron ore trading remains to be seen, although it seems likely that its influence on buying patterns and prices more generally will only grow.