Iron ore prices slip below a long-steady trading range

On January 14, TSI’s benchmark 62% Fe fines price for Chinese iron ore imports slipped under the US$130-140/dry metric ton trading range it had occupied since August 16, 2013. TSI, or The Steel Index, is a separate, specialist pricing unit owned by Platts.

An unusual period of calm had settled on iron ore prices since the middle of last year, notable because iron ore has been a highly volatile commodity in recent years, eclipsing even copper’s range of price movements at times.

The weakening of the price came about as port stocks hit a 12-month high of more than 86 million mt at major ports and growth in Chinese steel production has stalled at around 2 million mt per day. Iron ore cargoes traded privately at lower price levels which, together with softening offers on electronic trading platforms, saw TSI’s benchmark 62% Fe fines price fall US$1.40/dmt on January 14 to US$129.50/dmt, CFR Tianjin. It gained slightly to $129.60 on the 15th, but still was languishing below $130/dmt. This index is utilized as the settlement for swaps, options and futures listed on the Singapore Exchange (SGX) and several other exchanges.

The forward curve for iron ore on SGX dipped under US$130/dmt for the January contract for the first time on January 9 and currently trends downward along the curve to under US$120/dmt by May this year.

Despite a lack of volatility in the second half of 2013, SGX reported impressive increases in derivatives and futures volumes cleared during last year, demonstrating the industry’s increasing appetite for managing price risk. Swaps volumes cleared on SGX more than doubled compared to 2012 to nearly 230 million mt, options monthly volumes increased tenfold in 2013 to total more than 32 million mt for the year and options open interest grew almost twentyfold compared to the end of 2012. Futures, newly launched on SGX in April 2013, saw monthly volumes increase by more than 25 times to 2.2 million mt in December.

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Prices for all steelmaking raw materials in Asia — including iron ore, coking coal and scrap — have been under pressure recently. And perhaps the only market participants to feel comfortable with the current price trends are steelmakers. While raw material prices have been on the wane, finished steel prices have been stable or rising recently, opening up some much needed margin.

The weakening of raw material prices and recent increases in steel prices represent a reversal of recent fortunes. Many observers note that the “ferro-dollars” from the rapid expansion of steel markets over the last decade have largely ended up at producers and processors of raw materials. What’s more, the US market has been marked recently by tight discipline, closure of uncompetitive assets and industry consolidation, and the spreads between prices in the US and the rest of the world have increased. Whether European and Asian steelmakers are able to achieve the same feat remains to be seen.

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