Evolution and change within the iron ore market Platts 2013 Steel Raw Materials Asia Conference
Damon Buckley Singapore, May 2013
Standard Bank - Global cross-sector mining & metals financial franchise London Sector
CIB Coverage
Rajat Kohli Global Head: Mining & Metals
Paul Stevens Head: Mining Finance
Andrew King Developed Markets
Anders Alfredson Director, M&M Coverage
Vaughan Wickins Director, M&M Coverage
Francois Gamet West Africa
Advisory Steven Wallace Global Head
ECM Simon Matthews Global Head
DCM Florian Hartig Global Head
Research
Equities
Peter Davey Ian Carton Head: Mining & Metals Global Head
Commodities Jim Coupland Global Co-Head Melinda Moore (Physical/ Derivative Sales & Trading) Andrew Fereday (coal derivatives)
New York Beijing
Ted Kavanagh Head: M&M Coverage Americas
George Fang Head: M&M Coverage Asia Ming Fai Wong Director, M&M Coverage
Dubai Rassem Zok CIB Franchise Head – Middle East
Shanghai Victor Yu Head: Standard Resources China
Simon Reeves Director, IB Coverage
Hong Kong Alfred Pang CIB Franchise Head: Asia
São Paulo Gabriela Alcantara M&M Coverage
Gloria Cheng Co-Head: M&A Advisory
Johannesburg Sector
CIB Coverage
Sune Brugman Global Head: Debt
Eric Von Glehn Brad Webber Executive Vice Co-Head President, IB Coverage
Brad Breetzke Global Head: Mining, Energy & Infrastructure Finance
William Blackie Head: IB South Africa
Peter von Klemperer Executive Vice President, M&M Coverage Africa
Advisory
Fradreck Shoko Co-Head
ECM
DCM
Commodities
Research
Walter De Wet Mesh Pilay Andrew Costa Mark Buncombe Head: Commodities Head Head Global Co-Head Research
Terence Chow Co-Head: M&A Advisory
Singapore Damon Buckley / Ivan Van Niekerk Physical/Derivative, Sales & Trading Max Cheng - physical coal Spence Pitts – bulk derivatives
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The Only Thing That Is Constant is Change Heraclitus Greek philosopher of Ephesus (near Turkey) around 500 BC
Iron Ore Market Analysis
3
China vs ROW Iron Ore Consumption Splits
When does Chinese steel demand peak? China Apparent Steel Consumption
Global Seaborne IO Consumption 140,000
1,200
120,000
1,000
Steel Demand per capita (MT)
100,000 80,000 60,000 40,000 20,000 0 Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12 ex-China Seaborne IO Demand
Iron Ore Supply (Million WMT per Annum)
600 400 200 0 2000
2005
2010
2015
2020
2025
Total China IO Demand
Traditional Supply Source Continue to Dominate 900 800 700 600 500 400 300 200 100 0 Australian Tonnes
800
2016 Brazilian Tonnes
China Domestic Concentrate Tonnes Indian Tonnes Northern European Tonnes
Other South American Tonnes
South African Tonnes
North American Tonnes
Other African Tonnes
Other Tonnes (Asia/ME)
Source: World Steel Association; Standard Bank Research
Standard Bank’s Iron Ore Pricing Outlook
Iron ore Price US$/DMT CFR China 62% Fe
Monthly Iron ore demand (MT)
China versus ROW
2030
Evolution of pricing mechanics for iron ore
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Iron Ore Pricing Evolution Timeline Benchmark + Spot
Price System
Annual negotiations setting industry price
Long term plus significant volume price contract by contract.
Index reference price reference to spot price
Forward pricing with flexible opportunity for price fixing up to 3 years in advance
Price Determination
Single forward price for annual period
Multiple daily prices divergent from long term price
Multiple Daily prices with long term linked to reference to short term contracts
Price linked to physical clearing mechanisms and terminal market
Buyer Involvement
Small Buyer Groups
Multiple physical buyers
All Buyers
All physical buyers, intermediaries & financial participants
Seller Involvement
Concentrated Suppliers
Multiple physical suppliers
All Sellers
All physical sellers & financial investors
SWOT Analysis
• • •
Non-Transparent Lack of secondary market Non responsive to market
• Improved price discovery • Price reflect economics • Divergence between short term and long term price
Index Pricing
Financial Convergence
Annual Benchmark
• Increased transparency • Issue of liquidity and price responsiveness • Fragmented mechanisms
• Responsive to economics • Finance/Physical converge • Market depth & liquidity
Price consistency / transparency leading to convergence between physical/financial markets
Systemic industry shifts in the iron ore industry
Chinese Demand Growth Urbanisation and Industrialisation
Two Key Industry Shifts
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Iron Ore Pricing Dynamics Shift from Benchmark to “Market Driven” pricing
Change in the iron ore market • Growth in the number of physical participants • Increased diversity of stakeholders • Development of financial mechanism for price discovery
Market Requirements
Consumers
Flexible pricing mechanism
Hedging & Financing tools
Liquidity
Transparency
Price Consistency
Price Convergence
Market Maturity
Suppliers
Flexible pricing Mechanism
No Return for The Benchmark System - under any scenario
Hedging & Financial tools
Remaining market challenges – devolution risks
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2
3
4
5
Lack of liquidity in reference price
Consistent Pricing Methodologies for grade
Pricing transparency within non China markets
Future market consolidation of supply
Financial volatility and uncertainty
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For nothing in the cosmos is fixed Everything is subject to change The wise realize by accommodating constant change Lead to the growing and becoming that govern all Tao Te Ching
Iron ore – Evolution of Financial Trading Platforms
1 2 3 4 5 ?
OTC Swaps (Bilateral exchange)
OTC Swaps (Centralised clearing)
Futures (On-exchange)
Clearing House Electronic Trading Platforms (CME, ICE, SGX)
Chinese electronic platforms (SHFE, Dalian, Zhejiang, LME)
What’s beyond?
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