Cisa highlights importance of ‘real’ transactions in calculation of iron ore indices

The China Iron & Steel Association (Cisa) has said that iron ore indices should be based on “real market transactions rather than being influenced by futures and swaps curves.”

In an interview with Xinhua News Agency last weekend, Cisa vice-chairman and director Luo Tiejun warned that market participants should be cautious about speculative risks, because some iron ore indices were “deviating from the spot market and supply-demand fundamentals.”

The director also urged stricter supervision of speculative trading on spot and futures markets and the publication of iron ore indices to maintain the healthy development of the steel supply chain.

Fastmarkets has been publishing iron ore indices, which are used in physical contracts and as settlement basis for exchange-listed derivative contracts, since 2008 and adhering to the two major principles of objectivity and balance. 

To ensure that an index is reflective of transparent spot market transactions, Fastmarkets assigns fixed-price spot transactions the highest tonnage weighting in the calculation of its indices. Such transactions are predominantly concluded on online trading platforms and thereby visible to a vast majority of the iron ore market, allowing participants to independently verify the indices’ representativeness.

Index-linked price deals or prices represented by a futures contract’s forward curve are not used as transaction data inputs in the calculation of Fastmarkets’ indices.

The data collected from the market is categorized into the three categories – producers, consumers and traders – and each is assigned equal weighting in the calculation of the final index.

Fastmarkets also uses non-transaction data, comprising bids, offers and market participant estimates of tradeable levels, to formulate the index of the day. Such data, if used, is assigned minimum weighting in the calculation to minimize the impact of any subjective data on the final index.

Fastmarkets publishes the estimates of tradeable levels for various brands provided by market participants, along with any bids, offers or transactions heard in the physical market, to provide transparency on the data feeding its indices and on activity heard in the market.

A mathematical outlier filter is used to discard data that falls +/-4% away from its preliminary index calculation.

The price reporter may apply judgment to discard data that is found to be inconsistent with the rest of the market, is missing any crucial details or is not corroborated by sufficient market sources, among other reasons.

Any use of judgment in the calculations is revealed in the pricing rationale, published daily along with the index.

The Fastmarkets iron ore indices are compliant with the International Organization of Securities Commission (Iosco) principles, which set out global standards for orderly and fair price assessment processes.

The iron ore market has seen several periods of volatility over the past decade amid a mismatch in global supply and demand at top consumer China.

The rapid development of China’s economy and, in turn, its steel industry, has attracted new investments in iron ore projects, leading to an expansion in iron ore capacity since 2008 with miners rushing to satiate Chinese demand.

The Chinese steel industry has also grappled with oversupply over the past decade, with the government introducing supply-side reforms in 2015 to address the oversupply problems and to eliminate the production of substandard products.

Last year, disruptions to Brazilian operations affected nearly 93 million tonnes of production at one point, pushing seaborne iron ore prices to a five-year high.

In the same period, China posted a record steel production of just under a billion tonnes.

Iron ore supply concerns continue to grip the market this quarter, with the novel coronavirus (2019-nCoV) outbreak weighing on the steel demand in China and globally.