Stable index, volatile brands: the next chapter in iron ... · • Wider brand spreads have led to new 62% indices for subsets of this market. Some split the 62% Fe market by origin

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Stable index, volatile brands: the next chapter in

iron ore pricingChanges and challenges ahead for the pricing system

2

• Argus is the world’s largest privately owned PRA, with a team of 850

from 21 global offices

• 11,000+ daily price assessments

• IOSCO compliant methodology

Also offers…

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Copyright © 2017 Argus Media Ltd. All rights reserved.

Coverage includes:

• Energy

• Fertilizers

• Petrochemicals

• Global metals

3

• Stable index, volatile brands

• Under pressure: the 62% Fe benchmark

• The Argus approach to iron ore

Agenda


4




Agenda


5

• Benchmark iron ore prices have been remarkably stable in 2018

• The middle two quarters saw prices in $60-70 range

• Albeit, volatility has returned in recent weeks…

2018: The (iron ore) year in review


$30

$40

$50

$60

$70

$80

$90

$100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Argus ICX 62% iron ore index

2018

6






$30

$40

$50

$60

$70

$80

$90

$100



2017 2018

7






$30

$40

$50

$60

$70

$80

$90

$100



2016 2017 2018

8

$50

$55

$60

$65

$70

$75

$80

$85Argus ICX 62pc iron ore index

• Benchmark iron ore prices have been remarkably rangebound in 2018





$17.75/dmt

2018

9

• Healthy steelmaking margins have been the norm…for most of this year

• Leading Chinese mills to focus on productivity



$0

$50

$100

$150

$200

$250

$300

$350

$400

$300

$350

$400

$450

$500

$550

$600

$650

Chinese steel prices & implied furnace spread

Implied BF spread Rebar (FOB China) HRC (FOB China)

10

China policy drives buying habits


• Policy, particularly relating to tougher environmental restrictions, has

also shaped buying behavior for iron ore.

11

This has supported demand for premium ores


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

$0

$20

$40

$60

$80

$100

$120

02

-Jan

-20

15

02

-Mar

-20

15

02

-May

-20

15

02

-Ju

l-2

01

5

02

-Sep

-20

15

02

-No

v-2

015

02

-Jan

-20

16

02

-Mar

-20

16

02

-May

-20

16

02

-Ju

l-2

01

6

02

-Sep

-20

16

02

-No

v-2

016

02

-Jan

-20

17

02

-Mar

-20

17

02

-May

-20

17

02

-Ju

l-2

01

7

02

-Sep

-20

17

02

-No

v-2

017

02

-Jan

-20

18

02

-Mar

-20

18

02

-May

-20

18

02

-Ju

l-2

01

8

02

-Sep

-20

18

02

-No

v-2

018

Argus 65% vs. 62% index

% Premium for 65

Iron ore fines 62% Fe (ICX) cfr Qingdao prompt, Singapore close, midpoint, USD/dmt, cfr

Iron ore fines 65% Fe cfr Qingdao prompt, Singapore close, midpoint, USD/dmt, cfr

12

This has supported demand for premium ores


0

5

10

15

20

25

30

35

40

03

-Jan

-20

18

03

-Feb

-20

18

03

-Mar

-20

18

03

-Ap

r-2

01

8

03

-May

-20

18

03

-Ju

n-2

01

8

03

-Ju

l-2

01

8

03

-Au

g-2

01

8

03

-Sep

-20

18

03

-Oct

-20

18

03

-No

v-2

018

c/d

mtu

Argus ICX Lump Premium

$80

$90

$100

$110

$120

$130

$140

$150

$160

11

-No

v-1

7

31

-Dec

-17

19

-Feb

-18

10

-Ap

r-1

8

30

-May

-18

19

-Ju

l-1

8

7-S

ep-1

8

27

-Oct

-18

16

-Dec

-18

64% Fe, 3% Al Pellet trades (2018)

• Direct charge ores benefited from pollution control measures

• Pellet prices easing on less stringent than expected pollution controls

13

But it has also pulled apart the core of the 62pc index…


-15.00

-10.00

-5.00

0.00

+5.00

+10.00

Brands vs. Argus ICX (62pc Fe basis)

BRBF62 diff to ICX, USD/dmt, cfr JMBF62 diff to ICX, USD/dmt, cfr

MACF62 diff to ICX, USD/dmt, cfr NHGF62 diff to ICX, USD/dmt, cfr

PBF62 diff to ICX, USD/dmt, cfr

• Wider quality spreads not only between 62%, 65% and 58%

• Spreads now wider between the products making up the indices

14




Agenda


15




Agenda


16

The inputs into the 62% Fe index are diverse


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

10

20

30

40

50

60

70

Nu

mb

er

of

de

als

Transactions underpinning Argus ICX 62pc index

BRBF PBF NHGF

MACF JMBF SFLA

RTX PBF Share (%) - RHS

• The 62% index has served as a

successful reference for nearly

a decade

• Multiple inputs allow sharing

of risk and responsibility of

index creation

• An index dilutes the pricing

power of any single actor

• The 62% Fe reference is

matched with a liquid hedging

mechanism (e.g. SGX)

The challenge being posed to the

62% index is from volatility in

the component brands

17

• Indices can be generated from other data, such as bids and offers, but

transactions are core

• As well as low liquidity, there is limited diversity in inputs

Compared with 62% indices, the others are illiquid


0

2

4

6

8

10

12

14

16

Transactions underpinning the 65% Index

IOCJ

0

2

4

6

8

10

12

14

Transactions underpinning the 58% Index

18

• The futures markets have allowed risk management, and enabled use

floating prices in indices

Futures market around 62pc is shrinking


-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Iron Ore Derivatives: Growth and volume

Year-on-year change Volume

19

• The use of floating price deals in the index is only possible with a liquid

futures curve

The use of floating prices in the 62pc index has become critical


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18

62pc Spot Trade

Fixed Price Floating Price

Just 21% of deals were fixed price in October

20

• Wider brand spreads have led to new 62% indices for subsets of

this market.

◦ Some split the 62% Fe market by origin and product

◦ Each brand assessed based on its own data pool

◦ Reduction of liquidity

◦ Concentration of pricing power

• Pricing increasingly moving towards an “oil” model (end of day

pricing).

Recent developments risk accelerating fragmentation


21

• As the index concept comes under pressure, the

industry is also looking afresh at the best index to use

• The buy side in China, via CISA, has requested a

“basket” approach: sellers are looking at new options

• This puts further strain on the physical financial link

• At the center are questions around methodology

Basket pricing: a methodology hedge?


End-of-day methodology• Priority of data based

on timing• Bypasses current

trading channels• Individual company

responsibility• Named participation

Volume-weighted average• Priority of data based

on quality and volume• Supportive of existing

ecosystem

?

Index Methodology?

22




Agenda


23




Agenda


24

Argus ICX62pc index: Evolved and ready for use


ICX

International Price Reporting Agency with size and scale

Organisation-Wide Compliance Framework

Stable Team: average of 5 years of ore experience

Benchmark Administration Experience (Paper/Phys)

Methodology Tailored to the Iron Ore Sector

All Day Volume-Weighted Average, maximising data

Seaborne and Portside iron ore indices

Daily published rationale

Input transparency

Monthly Audit

Systemic incorporation of floating price trades

Time normalisation of trades to the same point in time

Forward Curve Integration

Open Sourcing of data: trade data prioritised, not venue

Increasing frequency of trade data availability

Intraday pricing started: seaborne, portside and indicators

• Extensive evolutions since

September 2017 are aimed at

establishing a market-leading

alternative:

◦ The most experienced team of any PRA

at managing iron ore benchmarks – both

financial and physical.

◦ Bespoke iron ore methodology tailored to

needs of 2018 and beyond

◦ Volume-weighted average methodology

combined with IOSCO data hierarchy

◦ Integration of index-linked pricing and

futures markets

◦ Expansion of port stock coverage

◦ Daily lump pricing

◦ Intra-day updates

25

• Collection of the broadest possible set of

verifiable data.

• Processing this data in a consistent,

explicable process to produce the final

price.

• Volume-weighted average with data

hierarchy matching IOSCO principles

The Argus ICX™62pc Iron Ore Index: Methodology Principles

Normalised

to ICX

Spot transactions

reported by market

Screened

for outliers

Volume-

weighted

average

Index

E-Platform trades

Bilateral trades (100%)

Floating trades

bids/offers (50%)

Platform

Bid/Offer

(20%)

Trade data

(bids and offers)

and indicative levels (5%)

Fall-back

26

ICX™62pc: binding the off-shore ecosystem


• The ICX ecosystem would

look familiar

• ICX seeks to bind the

existing architecture

• Financial and physical

markets connected via

floating trade and timing

• This sets a predictable

seaborne environment for

the medium term

Trading Screen

Floating Trade

Futures

ICX

27

Action Screen TRADE:Paid

Trade Date and Time 01-Nov-18 17:30:32

PRODUCT NF gO 62% Fines CFR-QD (STD Index)

QUANTITY(WMT) 90kt

DELIVERY SLC 1-10 Dec 2018

Notional Arrival Period(s) Dec'18

PRICE

Index INDEX Argus 62%

Discount to Index 0.00

Quotational Period 1 - 31 Dec 2018

Premium +US$1.90/mt

INDICATIVE NON-BINDING INFOBuyer shall ensure that the L/C is issued and received by Seller no later than 7 days prior to the start of the SLC. Upon or after Seller-s receipt of an acceptable L/C, Seller will submit to Buyer for Buyer's approval a vessel nomination notice. The L/C value shall be determined using a provisional quotation period equating to the average of the iron ore prices published by the Pricing Index for the first 20 days of the month prior to the start of SLC date.

Argus ICX seeing usage


• BHP sold Newman Fines basis the Argus index on 1 November

• Argus ICX62pc index attracting more attention from buy and sell side

28

• Brand prices launched last week;

history back to December 2017

• The brands are published as a

relativity to the ICX 62% Fe index,

along with outrights for reference.

• They are calculated using the same

published differentials (ViM) that

are used to normalize deals to the

index

Argus launched quality-driven brand prices in October


29

• Each brand index is underpinned by the same data as the wider index

• Using market-informed quality adjustments avoids problem of illiquidity

for specific brands

How are brand prices arrived at?

30

• Despite rangebound benchmark (62% Fe), there has been a surge of volatility in the inputs to that benchmark.

• The 62% index is relatively liquid and diverse, compared with others.

• However, the 62% Fe index is being fragmented into sub-indices, as wider spreads pull in different directions.

• At the same time the industry is requesting a basket, and 62% futures volumes are falling.

• Argus has reengineered its 62% Fe index with a view to addressing:

◦ Interbrand volatility

◦ The continuation of a liquid 62% Fe index

◦ Supporting a sustainable off-shore pricing system for iron ore

• Index is now seeing increased usage

Conclusions and summary


31

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Stable index, volatile brands: the next chapter in iron ... · • Wider brand spreads have led to new 62% indices for subsets of this market. Some split the 62% Fe market by origin