Iron Ore
Iron Ore
Iron Ore
Available Supply
Seaborne Freight
6
Production
Consumptipn
Export
10
Top 5 Iron Ore Producing Countries 1. China 2. Brazil 3. Australia 4. India 5. South Africa Top 5 Iron Ore Consuming Countries 1. China 2. Japan 3. India 4. Russia 5. USA Top 5 Iron Ore Exporting Countries 1. Australia 2. Brazil 3. India 4. South Africa 5. Canada Top 5 Iron Ore Importing Countries 1. China 2. Japan 3. South Korea 4. Germany 5. Taiwan
11
Reserves: 25 Billion Tons (6% of Global), ranked 5th - High quality reserves 4th largest producing country218 Mt (FY 2009-10) 3rd Largest exporting country117 Mt (FY 2009-10)
12
13
200 Mn tonnes
150
100
50
Production
Consumptipn
Direction Of Trade
2010-11
(Apr-Jan)
15
Stable and longer price cycles are history. After decades, annual benchmark pricing is dismantled. Quarterly; Monthly; Spot; Index- A new era has started. Prices have moved from US$ 17 to US$ 170 in 7 years: Higher returns = Greater risks Price risk management no longer optional.
16
US$/DMT 200 180 140 150 120 130 170 190 160 100 110 1-Apr-10 5-May-10 4-Jun-10 5-Jul-10 3-Aug-10 Weekly 2-Sep-10 1-Oct-10 1-Nov-10 30-Nov-10 Yearly 31-Dec-10 1-Feb-11 2-Mar-11 31-Mar-11
17
. Iron Ore is moving in the direction of setting prices as Copper, Nickel or other base metals are on a completely transparent Exchange under the full control against any type of manipulations .
Source: Iron Ore Market 2009-2011 (UNCTAD)
18
200
150
125
100 175 01-Apr-10 21-Apr-10 11-May-10 31-May-10 20-Jun-10 10-Jul-10 30-Jul-10 19-Aug-10 08-Sep-10 28-Sep-10 18-Oct-10 07-Nov-10 27-Nov-10 17-Dec-10 06-Jan-11 26-Jan-11 15-Feb-11 07-Mar-11 27-Mar-11 4.00 2.00 0.00 6.00 -2.00 -4.00 -6.00 Movement (%) Price (US$/dmt)
19
Example - Hedging
It is January 2011 and the price for iron ore CFR China 62% Fe fines currently stands at $ 174.60/dmt. Buyer (Steel mill) A steel mill in China expects to import iron ore 62% Fe fines of a Cape size shipload of 75,000 metric tons (mt) in March 2011 and wishes to fix this cost as they have just clinched a major deal to supply flat steel products in 2011. To hedge this position, this steel mill will bid at $169.00/dmt for March 2011 Iron Ore Swap on CFR China 62% Fe Fines. Seller (Iron ore trader) At the same time, an iron ore trader with an inventory of iron ore wishes to hedge against a possible decline in stock value from drop in iron ore rates. The trader would like to lock-in the iron ore price of $169.00/dmt.
20
Example - Hedging
Buyer: Seller: Product: Quantity: Contract Price: Settlement Date: Settlement Basis: Steel mill Iron ore trader Iron Ore CFR China 62% Fe Fines 75,000mt (750 lots) $169.00/dmt 31st March 2011 Average of the spot price assessments of the contract month
Due to natural calamity in Japan, the price of iron ore CFR China 62% Fe fines falls from $174.60/dmt to $169.36/dmt in March 2011. As a result, the steel mill doesnt suffer an increase in input cost.
21
Hedge Result
Buyer Steel Miller Physical Ease in cost = $2,62,000 [(174.6-169.36)*500*100] Futures Payoffs = $ 18,000 [(169.36-169.00)*500*100] Net P/L = $ 2,80,000 [262000+18000]
Seller Iron Ore Trader Physical Rise in Value = $2,25,000 [(109-106)*500*100] Futures Payoffs = -$2,62,000 [(105.5-109)*500*100] Net P/L = -$ 37,500 [225000-262000]
22
Benefits of Hedging
Hedging is the process of offsetting risk (by locking effective price), owing to adverse price movements, by taking opposite position in the derivatives market against the position in the spot market. Any gain or loss in the spot market offset (partially if not fully)with the loss or gain respectively in the derivatives market. For a stable and manageable balance sheet of a company, hedging in indispensible.
23
Us$/DMT 175.00 200.00 150.00 125.00 100.00 01-Apr-10 26-Apr-10 21-May-10 15-Jun-10 10-Jul-10 04-Aug-10 TSI 29-Aug-10 23-Sep-10 18-Oct-10 SHFE 12-Nov-10 07-Dec-10 01-Jan-11 26-Jan-11 20-Feb-11 17-Mar-11 4000 3500 5500 4500 5000 SGX
24
Yuan/Tonne
Volatile Iron Ore prices are impacting steel mills ability to secure stable prices eventually it will off load on the consumer (you and I) Steel buyers can access the iron Ore swaps market to hedge (with basis risk) a portion of their price risk this is similar to airlines hedging jet fuel exposure using crude oil contracts or steel contracts which meets the needs of buyers in different parts of the world There are several steel contracts available at Exchanges (LME, DGCX etc). Volumes are increasing.
25
Steel Mills
Spot Steel
Steel Users
Locked in Margin
27
About ICEX
Over 450 memberships with more than 1000 TWS spread across India
28
Key Stakeholders
26% 10% 5%
26%
29
Key Stakeholders
Reliance Exchange Next Ltd - A wholly owned subsidiary of Reliance Capital, represents Reliance entry into Exchange vertical. R Next aims to be present across asset classes in the Exchange space MMTC Ltd - Leading exporter of Minerals, largest buyer of Fertilizers, biggest importer of Bullion & Non- Ferrous Metals in India and active player in agro-products Indiabulls - Top ranked business houses in India with business interests in Real Estate, Infrastructure, Financial Services, Retail, Multiplex and Power KRIBHCO - Worlds premier fertilizer producing Cooperative Society IDFC - Specialized financial intermediary for infrastructure development IPL - Biggest canalizing agency for import of Urea and other fertilizers on behalf of GOI
30
Contract Month
32
33
34
35
Thank You