Physical iron ore ‘trading at $3 to $4 below benchmark 62% Fe indices’

Physical iron ore is now available at Chinese ports at a $3-4 discount to benchmark 62% Fe iron ore prices, according to US investment bank Citi’s director of iron ore and steel trading, Mark Lyons.

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Prices for 62% Fe iron ore reached their lowest level for almost two years this week but, according to Lyons, the real transaction level for benchmark material was several dollars lower than the index price.

“A two-tier market has emerged,” Lyons said. “The real price is the physical sales price in China – but that is, on average, about $2-3 under the index.”

Citi noted that Pilbara fines were available in port on Wednesday May 21 at $95 per tonne, whereas spot index prices for 62% Fe material were more than $98 per tonne.

Metal Bulletin’s China port stocks index stood at 674 yuan per tonne on Wednesday. This was equivalent to $94.53 per tonne, when taking into account exchange rate, conversion to dry metric tonnes, tax and port charges.

This was a $4.36 discount to Metal Bulletin’s 62% Fe iron ore index level on Wednesday, calculated at $98.89 per tonne cfr Qingdao.

This deviation between actual prices and the indices was causing concern to traders, who need index prices to be exactly correlated to physical transaction levels in order to hedge, Lyons said.

“The old-school Chinese traders are not running mark-to-market. They are happy to miss the occasional offer to support the index,” Lyons said. “On the other side, people want indices to reflect the market.”

Mark-to-market is the practice of calculating the daily exposure of your position in a financial market.

The divergence in prices has caused concern not only to traders but to producers of high-grade material, which have seen premiums collapse as a flood of material came onto the market.

“Those holding high-value material are now having to unwind positions,” Lyons said.

The iron ore market saw prices start to fall rapidly in March when Chinese steel market weakness became apparent with the default of a privately owned mill in Shanxi, Haixin Steel. The move drove iron ore prices down by 11% in four days – to $103.99 on March 10 from $116.44 on March 6.

Despite efforts by some Chinese traders which held large stocks of iron to push up prices to $115 per tonne in April, huge new volumes of iron ore coming onto the market resulted in offers pouring in and driving prices down.

Chinese traders were now trying to establish where the new floor for iron ore prices will be, Lyons said.