The iron ore futures market is evolving across Asia and bringing exciting new hedging and trading opportunities. This week, our brokers attended the most anticipated event in iron ore and steel markets - Singapore Iron Ore Week; hosted by the Singapore Exchange (SGX). The event featured remarks by the Chairman of the Exchange, Secretary-General of China Iron and Steel Association, marketing executives from Rio Tinto and Vale, iron ore traders, producers, reporters, researchers, and hedgers.
Singapore Iron Ore Week began in 2013 in Singapore, which is the world’s 2nd largest metals and minerals trading hub after Switzerland. The SGX reports that over 50% of the 140 companies registered in this category actively trade iron ore and steel products. As the organizer of Iron Ore week, the SGX holds an impressive position as the market leader in cleared iron ore derivatives with 95% of the global volume traded on their exchange. In 2017 alone, SGX cleared over 1.7 billion metric tonnes of iron ore derivatives.
Iron ore is a primary input for making steel and is the most commonly used metal worldwide in construction, engineering, machinery and automotive industries. The global iron ore market is more significant than all commodities except oil and gas.
Iron Ore Futures Competition
The Singapore Exchange’s largest competitor right now is the Dalian Commodity Exchange (DCE) in China. On May 4, the DCE began allowing foreign investors to trade iron ore futures contracts, one of the top 10 most active contracts when measured by average daily turnover. This move marked a pivotal moment for China in establishing itself as a dominant player in setting international prices for essential commodities. The iron ore futures contract is the most traded contract at the DCE, which launched in 2013 and ranks 8th in volume among global derivatives exchanges. The opening up to foreign investors to this contract is a huge win for China and Straits was honored to place the first foreign trade.
To illustrate the importance of the iron ore futures contract to the DCE, we have provided the chart below to highlight how Iron Ore Futures dominated April trading volume.
The recent allowance of foreign investors to trade the DCE iron ore futures contracts provides market participants with new opportunities to arbitrage between China onshore and offshore pricing. One of the more intriguing comments we heard at Singapore Iron Ore Week regarding this relationship was that the internationalization of DCE contract helps to reduce difficulties in currency conversion and facilitate tax consolidation. People we spoke with said it is beneficial for companies trading in both onshore and offshore markets especially with regulations loosening up. The contracts will help to mitigate currency conversion risks, which will see an increase in such arbitrage trading.
Trends in Iron Ore & Steel Pricing
In November 2017, Goldman Sachs predicted a 2018 iron ore price reduction of $60 a tonne in 3 months, $55 in six months, and $50 in 12 months. Prices moved against their predictions, and iron ore is trading higher than it was in November when they published their report. Many market events have occurred since the projections were released, which highlights the reality that iron ore and steel markets are volatile and hard to predict. Still, iron ore price trends on SGX seem to point to backwardation, which could be due to multiple factors including expectations of lower future demand due to buyers building steel inventory ahead of the tariff exemption deadline, a widening premium between high quality iron ore and considerable discount between lower quality iron ore, and structural changes that are happening in the iron ore and steel industry in China.
Structural changes in Chinese steel sector include closing older furnaces, consolidating steelmakers, and enacting policies to reduce air pollution. Also, Singapore Exchange recently reported the following regarding Chinese steel cuts: “The Chinese authorities have recently directed steel making production cuts focused in north-eastern cities such as Handan and Tangshan which will see steel production cut by 20mn mt or 7.5% of annual production whilst domestic coking coal producers have been instructed to reduce coking coal production by 30%.
When it comes to iron ore and steel production and consumption, all eyes are on China as the leading producer of steel and largest consumer of iron ore. In 2017 alone, China consumed 831.7 million tonnes of steel compared to 81 million in the US. If trade wars are indeed averted, manufacturing expands, and China continues to invest in fixed assets and urbanization, the higher their consumption of steel and the greater their continued demand for iron ore, which may support elevated trading levels.
During Singapore Iron Ore Week, the Straits Financial team was eager to hear remarks by the China Iron and Steel Association and the China Chamber of Metals & Minerals. Here are some notes from the panels we attended where executives from their organization shared their expertise:
• China is reducing production capacity and achieving supply-demand balance. China has been actively carrying out supply-side reform with capacity cuttings at an unprecedented scale. In two years, production capacity was reduced by 120 million tons and is forecasted to cut another 30 million this year. For the first quarter of 2018, the Chinese iron and steel industry is generally stable with crude steel production at 212 million tons, a year-on-year increase of 5%. Exports are at 15.15 million tons, a year-on-year decrease of 26.4%. In 2018, China’s macro economy performed well; GDP in the first quarter increased by 6.8%, and demand for steel is stable.
• Implementation of Article 232 seriously undermined the interests of exporters. Although exports to the United States have been declining over the years, and the amount of steel exports from China to the US was 1.18 million tonnes last year, it will still have a significant impact on large exporters. Potential tariffs on the downstream industries will also impact the demand for steel in the upstream. There is also a concern over chain reaction, worrying that other countries may follow suit.
Some other important quotes from Iron Ore Week reported from Singapore Exchange’s Twitter Feed:
- “US Companies can apply for exemptions from duties for steel needed in key operations.” – Ernst & Young’s Mok Sze Xin
- “China’s government should challenge anti-dumping; local steel mills should upgrade to higher value goods.” – Nanjing Iron & Steel’s Zhu Ruirong
- “Articles under section 232 claim to protect US people but 70% of imports come from exempted countries.” – China Chamber of Commerce’s Jiang Hui
- “Forecasts further widening of price by quality; China to import 22-mil mt more high grade but use less domestic ore.” – Custeel’s Yang Shufang
- “Expect a more integrated value chain with derivatives interwoven with core physical.” – China International Capital Corporations Lawrence L.
- “Three lessons from this market: balance supply & demand, unify price and value, harmoniously share profit in the value chin for win-win.” – CISA’s Liu Zhenjiang
- “On calls for more steel mills to hedge Coking coal: Only 20% of private mills are trading on DCE; public mills still lack the skills or approvals.” – Shandong Iron and Steel Group’s Zhu Yuting
- “Domestic derivatives increasingly used in contracts but price is often deviating from the actual market. Liquidity is adding volatility – profitable for traders at least!” - Shandong Iron and Steel Group’s Zhu Yuting
Who Says We Don’t Party!? - Cocktail Reception Hosted by Straits Financial (Singapore) During the Iron Ore Week
As traders from iron ore and steel industry assembled for the series of seminars, talks, networking sessions, the week culminated on a high with Straits Financial (Singapore) hosting one of the biggest cocktail parties for our industry friends. With an overwhelming guest list, free flow of alcohol, music, dancers, we only have pictures to tell the story. Till next year!
Straits Financial continues to provide our clients with the most comprehensive global trading solutions and strive for excellence and efficiency with all or our accounts. Please contact a Straits Financial representative in the US at +1 312-462-4499 or in Singapore at +65 6672-9669 to learn more and open an account to trade the world: http://straitsfinancial.com/sf/en/open-an-account.
Follow us on Twitter @StraitsFinancia or connect with us on Linked In here.
DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.