News Room - Steel Industry

Posted on 04 Aug 2009

Iron Ore Poised to Drop as China Imports Slow, Swaps Indicate

Iron ore is poised to decline from a nine-month high as rising stockpiles may reduce shipments to China, the biggest buyer of the steelmaking material.

 

Iron ore swaps for settlement in April, the start of the next contract year for deliveries, are trading at $87.60 a metric ton, according to SGX AsiaClear over-the-counter prices from Singapore Exchange Ltd. That’s 8.1 percent less than the price for immediate delivery on The Steel Index.

 

Stockpiles have surged to the highest in more than 10 months as China’s 4 trillion-yuan ($586 billion) stimulus plan spurs mills to secure supplies to meet steel demand for automobiles and buildings. BHP Billiton Ltd. Chief Executive Officer Marius Kloppers, pushing for an end to the annual contract system, is selling more ore on the cash market after prices soared 33 percent this year.

 

“The high stockpiles would suggest that you’ve got short- term weakness in iron ore prices,” Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group Ltd., said in Melbourne. Further gains in the cash price this year will be curbed by the restart of iron ore mines in China, trimming demand for imports, he said.

 

SGX AsiaClear completed its first iron ore swaps trade in April amid a decline in shipments to China that are priced on the traditional annual contract benchmark system. The size of each swap contract is 500 metric tons and is cash-settled based on the average of The Steel Index iron ore price in the expiring month. This price is for 62 percent iron grade ore, mainly shipped from Australia.

 

August Settlement

 

Since the first trade, SGX AsiaClear has cleared $120 million worth of contracts, covering 1.6 million tons of ore, SGX said yesterday in an e-mailed statement. The swap contract price for August settled at $96.70 a ton on Aug. 3, SGX AsiaClear said today in an e-mail. The cash price was $95.30 a ton, a nine-month high, according to The Steel Index.

 

Cash prices for higher grade iron ore delivered to China from India breached $100 a ton last week for the first time since the week ended Oct. 3. The price for the 63.5 percent ore gained 5.8 percent to $100.50 a ton for the week ending July 31, according to Metal Bulletin prices.

 

BHP Billiton, the world’s largest mining company, last week said it agreed to sell 30 percent of its iron ore through a mix of cash, quarterly and indexed pricing, breaking a 40-year tradition of annual contracts.

 

China’s iron-ore imports will likely drop in the second half as the government discourages stockpiling and higher prices spur domestic production, Standard Chartered Plc said last month. Inventories at China’s ports have jumped 25 percent this year to 75.3 million tons, according to Beijing Antaike Information Development.

 

Restart Production

 

China’s imports of iron ore jumped 29 percent in the first half as demand for steel rebounded, boosting cash prices 22 percent last month. Gains in the spot prices may provide an incentive for higher-cost ore mines in China to restart production, Barclays Capital said in a report last month.

 

SGX AsiaClear iron ore swap volumes in July rose 78 percent from a month earlier, and participants in the market include small-to-mid-sized steel mills and traders, Chinese shipping companies, international commodities houses, banks and producers, SGX said, declining to identify parties involved.

 

Chinese mills and iron ore producers are continuing the longest-running negotiations in the 40-year history of setting annual prices. The world’s three biggest suppliers BHP, Rio Tinto Group and Vale SA, control two-thirds of the world’s seaborne trade.

 

Brazil’s Vale, the world’s biggest exporter, is open to considering an index-based sales system, Ferrous Executive Director Jose Carlos Martins said July 30. Rio Tinto last month said about half of its iron ore sales this year have been on the spot market.

 

First Transaction

 

LCH.Clearnet Group Ltd., Europe’s largest securities clearinghouse, said in June it had started clearing over-the- counter trades in iron ore with its first transaction between Morgan Stanley and Cargill Inc. Trade in iron ore was worth $160 billion last year, with about 85 percent sold under annual contract, LCH.Clearnet said.

 

“The iron ore market is now rapidly moving from the annual benchmark pricing system to increased spot pricing,” John Banaszkiewicz, chairman of the Iron Ore and Steel Derivatives Association, said on July 31 after the association held its first meeting. Banaszkiewicz is also managing director of Freight Investor Services Ltd., a London-based iron ore and shipping brokerage that brokered the first trade in iron-ore swaps by LCH.Clearnet.

 

Goldman Sachs JBWere Pty last month forecast an average spot price for 62 percent iron grade ore of $84 a ton. China will account for about 68 percent of global seaborne trade in iron ore this year, according to Goldman.