Capesize

17950

Sep-17
0.00 0.00%

Panamax

11175

Sep-17
225.00 2.05%

Iron Ore

76.5

Sep-17
0.85 1.12%

Sing 380

278.25

Oct-17

Coking Coal

208

Sep-17
0.00 0.00%

Nola Urea

212.5

Sep-17
0.00 0.00%

The Battle for iron ore futures


The Battle for iron ore futures

This week, the iron ore paper market witnessed a “new kid on the block”, challenging established exchanges for market share. The debutante was Hong Kong Exchange (HKEK) who started iron ore futures trading on Monday, 13 Nov 2017.

HKEK may pose to be a serious contender, through its offering of more trading incentives to trade participants and with its close proximity to the vast China’s market,. After all, competition breeds excellence and this may push the market to greater height in term of higher volumes, transparency and efficiency.

 

Report card for iron ore futures trading on HKEX

Hong Kong exchange (HKEX) cleared 1,022 ferrous contracts at 102,200 dmt on its first day of iron ore trading session commenced on Monday. According to HKEX, the January 2018 futures saw the most trading volume on 13 Nov 2017, totaling 816 lots with closing at $63.05/dmt. Then, the next most active contract belonged to May 2018 futures with 120 lots traded at closing price around $62.90/mt.

The launch of iron ore futures contract placed HKEX in direct competition with Singapore Exchange (SGX) which introduced iron ore swaps to the market back in 2009. To attract trade participants into trading floor, HKEX has offered exchange fee waiver and exemptions for the first six months for the newcomers.

Meanwhile on Monday, the SGX saw a volume of 27,708 lots at 2.77 million tonnes of futures and options cleared, dwarfing the amount of trades settled in HKEX. After all, SGX has a long head start as compared to the new outfit offered by HKEX. Besides, the trading of iron ore derivatives are one of the strong points of the SGX which witnessed a growth of nearly 70% in 2016 alone.

However, HKEX stood out from its competitors through offering of different trading hours from 9am to 4.30pm, before a second session from 5.15pm to 1am. As opposed to SGX’s trading timing of 7.25 am to 8pm, with an overnight session that runs through 4.45am.

Moreover, HKEX’s new futures are mostly traded electronically, unlike the SGX AsiaClear contracts, where more than 85% of transactions are done over-the-counter (OTC). By adopting electronical trading platform, HKEX may bring in new trading participants on board that wishes to trade electronically.

 

Spot market slows by winter’s output cuts

Iron ore prices are moving in mixed direction due to uncertainty placed in the winter’s production cut. China-based mills that did not meet environmental regulation were heard to close down by the Chinese authority, way before the mandatory cut sets in mid-November.

A trade source indicated that if the mills passed the emission test probably they only have to cut back 20% on your steel output. However, for those who fail to meet the requirement, they may have to cut as steep as 75% of their steel output. Some mills were heard to be seeking for some iron ore cargoes as required as their output have been forced to cut back around 30%.

Due to reduced output, Tangshan billet prices, the barometer of steel demand in China went up by up RMB 50 day-on-day to RMB 3,870 on Tuesday. However, the higher steel prices failed to lift the buying interest from China-based mills as they waited for further market clarity.

As many trade participants are anticipating how the market will respond after mid-November when the output cuts are implemented in full force. As the severity of the output cuts will determine the price volatility of iron ore prices and the blast furnace cuts will affect the entire spectrum of iron ore production in greatly reducing their demand.

The Battle for iron ore futures 1

Mix performance seen in China’s Oct import

China imported 88.2 million tonnes of iron ore in October 2017, up 2.2% month-on-month, according to Thomson Reuters Supply Chain and Commodity Forecasts. Among the imports, the top three suppliers namely, Australia, Brazil and South Africa shipped 80.4 million tonnes in October, up 2.4% as compared to the 78.5 million tonnes recorded in September.

However, the data from Reuters clashed with those of China’s custom as it posted iron ore imports at 79.49 million tonnes in October, down 22.6% month-on month, hitting the lowest level since February 2016. This discrepancy in Thomson Reuters’ data and China’s custom may derive from difference in calculation method for imports arriving into China.

Based on China’s custom, the country’s imports volume rose by 6.3% to 896 million tonnes over the first ten month period of 2017 as compared to last year. The plunge in imports was mainly attributed to the Chinese authority to cut steel outputs to improve air quality as well as closing of inefficient mills across the country. As lower operating rates were seen with the utilization rate at blast furnaces dropping to 71% in the week to Nov 3, the lowest since at least 2012.

 

CISA predicts iron ore demand to fall in Q4

China’s iron ore demand is expected to plunge by 6 million tonnes in November, according to China Iron & Steel Association (CISA). The association has taken into account of the production cuts in mills in the forecast as the Chinese authority battled out for clean air quality in cities. Thus, they mandated an output cut for 28 Chinese cities starting from 15 November 2017 to next year March.

Subsequently, the production cut may extend to more cities as well due to stricter environmental measures. Thus, CISA predicted the iron ore demand to fall by 6 million tonnes in November, as compared to falling demand of 1.5 million tonnes in October. In the meantime, CISA expects iron ore supplies from the big four, or BHP Billiton , Rio Tinto , Vale and Fortescue Metals Group to increase 10.95 million tonnes quarter-on-quarter to 290 million tonnes in Q4, due to ramp up capacity.

 

India’s steel output hikes during Apr-Oct 2017

India’s finished steel production hiked by 5.1% to 61.375 million tonnes for the April-October period, according to the Steel Ministry. Then, the country’s crude steel production went up by 4.7% year-on-year to 58.416 million tonne over the April-October 2017 period.

However, India’s import of total finished steel stood at 4.916 million tonnes over the April-October period, up by 18.9% year-on-year, while imports in October only was recorded at 0.6 million tonnes, up by 11.5% at month-on-month basis.

The country’s overall exports then went down by 30.2% month-on-month in October 2017, but was up by 44.9% as compared to October 2016. In the meantime, the October steel consumption as posted at 7.486 million tonnes, up by 5.5% month-on-month

 

SGX’s coking coal doubles in Jan-Oct 2017

Singapore exchange (SGX) saw its traded volume of coking coal swaps doubled over Jan-Oct 2017 as compared to the same period last year. Over the first ten months of 2017, SGX posted 12.8 million mt of coking coal swaps traded volume, which was more than double the combined volume of swaps traded on both SGX and Chicago Mercantile Exchange in full year of 2016.

In fact, SGX noted that the amount of trade participants in coking coal swaps have tripled since at the start of the year, with more candidates joining every month. Due to the growing number of trade participants, the coking coal swaps volume traded in SGX is expected to expand further. Many industry participants have used the swap markets to manage their price risk and protect themselves from market volatility.

 

DBCT’s coal exports hike in Oct

Coal exports from Dalrymple Bay Coal Terminal (DBCT) to China has soared in October, thanks to strong steel demands. According to DBCT data, the port has shipped a total of 1.97 million tonnes of coal to China during October, up 165% year-on-year but down 4% month-on-month from the multi-year high of 2.05 million tonnes recorded in September.

So far, DBCT had exported more during the past five month at a total of 8.90 million tonnes as compared to nine months prior at 8.43 million tonnes. DBCT predominantly shipped out coking coal as well as smaller portion of thermal coal cargoes.

 

Verdict

Overall, the markets are mixed in anticipation on the extend of steel output cuts in China. The positive thing is that steel prices are still high and guarantee good margins for mills. Expects short-term bullish for futures with the DCE iron ore futures finding first support on 421 and first resistance at 471.5.

14nov2017