Need for high-grade iron ore derivatives grows
Widening grade differentials in the iron ore market has created the need for derivatives for high-Fe products, market participants said at the Singapore Exchange’s (SGX) Iron Ore Forum last week.
“The primary concern for the iron ore market is managing quotational period (QP) risks and there are risks on the high-grade premium,” Andrew Glass, Anglo American’s head of ferrous trading, said during a panel discussion at the event.
Tim Read, a bulks derivatives trader at Trafigura, pointed out that impurities and grade differentials had become more significant over the last 12-18 months and that “generic hedging tools are not enough.”
“We would like to see price discovery for different grades of iron ore as well as the penalties,” he added.
In an interview with Metal Bulletin, Singapore Exchange’s head of commodities William Chin said that the iron ore market appeared to have entered into a “new normal” with environmental concerns coming to the fore.
Chin sees the potential for a derivative product for high-grade iron ore in such a market, “as long as you believe this is a new normal and the market will continue to see semi-permanent, wide and possibly volatile differentials, then, yes, the market may benefit from such a derivative.”
At the moment, SGX offers cash-settled derivatives against a 58% Fe iron ore index and a 62% Fe iron ore index.
Both the CME Group and the Hong Kong Exchanges & Clearing (HKEx) also offer cash-settled derivatives against 62% Fe iron ore indices.
Metal Bulletin’s 65% Fe Iron Ore Index, on which high-grade iron ore producer Vale prices physical contract cargoes of its Iron Ore Carajas, averaged $83.97 per tonne in the second quarter of this year to date.
Metal Bulletin’s 62% Fe Iron Ore Index meanwhile averaged $65.85 per tonne in the same period.
The gap between the quarterly averages of these two indices went from a single digit to double digits in the fourth quarter of 2016 and has stayed above $12 per tonne since then.
For the second quarter of this year, so far the gap is $18.12 per tonne, up from $13.61 per tonne in the same period last year.
Earlier this year, Brazilian miner Vale said that the grade differentials for iron ore reflected a structural change in the market.
BHP has said that it expected suppliers of high-quality steelmaking raw materials to benefit from the increase in Chinese steel utilization rates and margins following supply-side reforms implemented by Beijing.
Earlier this week, low-grade iron ore producer Fortescue Metals Group said it would introduce a 60% Fe iron ore product called Fortescue Premium in the first half of 2019, with the development of its Eliwana project in Australia.
“Development of the Eliwana Project will maintain Fortescue’s low-cost status, providing us with greater flexibility to capitalize on market dynamics while maintaining a minimum 170-million-tonnes-per-annum production rate over 20 years,” its chief executive Elizabeth Gaines said in a statement.
Last month, the miner said that Chinese demand for low-grade iron ore might improve in the coming months once mills in China return their focus to cost cutting.
The miner, which shipped its billionth tonne of ore last month, reported an increase in ex-China sales in the first quarter of the year.