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Metal Bulletin Iron Ore Index GuideMethodology, Specifications and Usage
Metal Bulletin Iron Ore Index (MBIOI) GuideMethodology, Specifications and UsageThis guide is intended to introduce users to the market-leading Iron Ore Indices provided by Metal Bulletin.
Metal Bulletin have been reporting iron ore transactions since 1913 and were instrumental in the development of the annual benchmark system. Metal Bulletin has been tracking the Chinese iron ore spot market since its creation in 2004. As the market developed and liquidity increased, Metal Bulletin responded to market demands for a more robust pricing methodology, and led the develoment of index pricing.
Metal Bulletin Iron Ore Index provides six individual prices, each representing different parts of the iron ore market.
Contents
MB Index Subscription Package 4Introduction to Metal Bulletin Iron Ore Index Methodologies 6Iron Ore Methodology Flow Diagram 8MBIOI Usage Guide 9MB Fines Indices- 62%, 58% and 58% Premium, CFR Qingdao 10MB Pellet and Concentrate Indices CFR Qingdao 11MBIOI Value-In-Use Index 12MBIOI Price Consulting 13Appendix 14
Metal Bulletin | 3
Six iron ore prices:1. 62% Fe Fines•58% Fe Fines•58% Fe High Specification Premium•65% Fe Blast Furnace Pellet•66% Fe Concentrate•Dollar % Fe Value-in-Use Index •
Index History2. A full history for each of the Iron Ore Indices, starting May 2008 for 62% Fe fines •
Freight Rates3. Coverage of the major freight routes with prices supplied by leading freight brokers •
Historical Freight Rates4. A full history of reported freight rates for major iron ore routes •
Iron Ore News5. Up-to-date iron ore reporting across markets, people, finance and freight •
Index Commentary6. Daily commentary on market dynamics, price direction, analysis of trends and recent data along with •
short-term forecasts
Index Alert and Daily Newsletter7. All the numbers emailed to subscribers at mid-day London time•Daily newsletter includes index commentary, price charts and latest market developments •
Access to Iron Ore Index Analysts8. We welcome interaction with our clients and are on hand to answer any specific questions on the indices and •
the market
Access to price consulting9. The ability to price ‘off-index’ iron ore•Insight into pricing strategies and industry developments •
Regular iron ore spot market data and in-depth insights into the market10.
What do subscribers receive with their Metal Bulletin Iron Ore
Indices package?
Metal Bulletin | 4
Metal Bulletin | 5
www.mbironoreindex.com
Daily alert direct to your inbox- latest iron ore news - spot market data - historical data
Subscribers to the Metal Bulletin Iron Ore Indices recieve a daily alert with all the latest index calculations direct to your inbox. Access to all our prices is available online, including all historical data with latest prices available through the daily newsletter. The website also provides the latest iron ore news and market developments.
Introduction to Metal Bulletin Iron Ore Index MethodologiesThe Metal Bulletin Iron Ore Indices (MBIOI) are reference prices for the iron ore spot market. They are tonnage-weighted calculations of actual transactions that have been normalised to a base specification and delivery point, using the value-in-use for different materials applied by the market.
DATA COLLECTION
The basis of all our indices is the data provided by the market. In order to provide the most representative pricing for the market, it is essential we are able to collect as many quality data points as possible.
Metal Bulletin (MB) utilises a number of methods to collect data including phone calls, email, website input and messenger services across our offices in London, Singapore, Sao Paolo and Shanghai. To contribute data directly, please email: [email protected]
All data is stored on secure servers.
Chinese PartnerMB has partnered with Shanghai Steelhome, a leading independent market intelligence, data and consultancy company covering the Chinese steel industry. Steelhome supplies daily transaction price data from its widespread contact base of steel producers and iron ore traders within China. This is integrated into the MB Index model, making it the only index provider with such access to Chinese data.
Actual TransactionsThe indices are based on actual transactions, which are reported to us by any market participant who is conducting trades on a CFR China spot basis. The origin of material and specifications are included, and normalisation curves are developed for different material.
Transaction DataIn order to create the most representative index, MB requests the following aspects of the transaction for inclusion in the calculation:
Transaction price•Material grade and type•Origin•Tonnage•Delivery point•Delivery period•Payment terms•Name of company•Date of transaction•Any other relevant data to pricing•
MARKET BALANCE
The Metal Bulletin Indices use a unique mechanism to structurally balance the influence of all sides of the market. This reduces market distortions and bias in the data.
Three Sub-IndicesThree sub-indices are created based on data received from producers, consumers and traders. The sub-indices are based on a tonnage-weighted calculation of actual transactions normalised for chemistry and freight.
The final index is a straight average of the three sub-indices, allowing for equal representation from all sides of the market. Only the final indices are published.
If more tonnage is reported by one of the groups (producers, consumers or traders), it will contribute to the detail of the sub-index, but does not over influence the market as it will always be one-third of the final calculation.
All market data is combined into a single reference price, allowing maximum liquidity, and hence robustness in the model.
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NORMALISATION
Value-in-UseThe data is normalised using an in-house developed model based on the value-in-use applied by the market to different material grades, to a single chemistry and using the latest freight rates supplied by one of the leading brokers to a single port (Qingdao).
The normalisation coefficients have been developed using MB’s extensive historical data and history of reporting prices in this market, and are updated every month to reflect the constantly changing value-in-use of different products and grades.
Material that differs from the base specification but falls within the target range is normalised to the base specification and port. The base specification has been chosen in consultation with the market to reflect the reality of the physical market.
Payment termsPayment terms are based on typical commercial practice in the iron ore spot market. Transactions that are conducted on different payment or credit terms will be normalized back to the base specifications, taking into account discounts, current interest rates and standard commercial terms.
Material in different forms (eg. pellet) is excluded as appropriate from the index in question. Domestic Chinese material, and material imported by routes other than by sea, for example by train or truck, is also excluded, as is material that has been delivered and is held on stockpile at the dock.
MARKET REPRESENTATION
The Metal Bulletin Indices have been specifically constructed to automatically exclude outliers and provide a fair market representation through the three sub-indices.
OutliersAll data points that fall greater than 4% away from the initial calculated index are excluded, and the index recalculated. Outliers will be investigated, and attempts to influence the index unfairly will result in the data provider being warned or excluded. MB reserves the right to exclude data points that it believes are an attempt to manipulate the market.
MB reserves the right to demand to see contracts and signed paperwork before inclusion of the data in the calculation. If this is refused then the data, or the data supplier, can be excluded from the data collection process. Furthermore, MB reserves the right to exclude data that it does not feel is fairly presented or is an effort to distort the market.
If the material delivered is different to that expected at the original transaction no changes will be made to the indices. The spot price paid was for the expected material. Any changes made in retrospect are between buyer and seller.
PUBLICATION
The index will be published on UK holidays. In the event of technical difficulties or other unforeseen problems, the index will be published from our Singapore or Shanghai office, as appropriate.
MB has no financial interest in the level or direction of the index.
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Phone Email Website Chinese Data
Data collected from wide range of participants; with option of NDA.
Data Collection Model Metal Bulletin
Metal Bulletin’s Calculated Coefficients
‘One-way’ Information flow between Index department and editorial.
Materials from different origins exhibit different value-in-use to the Chinese market. As a result, different origins have unique normalization curves and coefficients
India
Brazil
Australia
Other...Normalisation procedure
Prices normalized based on Fe content and Freight rates
Once each data point is normalised it gets put into the relevant sub-index.
A preliminary Index figure is calculated from the three sub-indices. Each sub index is volume weighted.
Three sub-indices; each tonnage weighted to balance market.
The final index is the non-weighted average of the three sub-indices.
TradersProducers Consumers
Preliminary MBIO Index Figure
TradersProducers Consumers
MBIO Index
The data from the day’s model is collected and stored to create the next quarter’s correlation coefficients.
Outliers lying more than 4% away from the mean price are excluded and the index calculated
once more.
Normalisation coefficients based on value-in-use curves are developed In
house. The coefficients are created using the previous
quarter’s price data.
Freight ratesAustralia
Capesize Route
India Capesize Route
Brazil Capesize Route
Bloomberg MBIO62DA
MBIOI Websitewww.mbioi.com
Singapore Mercantile Exchange
www.smx.com.sg
Daily EmailAlert
Reuters .IO62-CNO=MB
Metal Bulletin Iron Ore Index:Capturing the relationship between different materials
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MBIOI Usage GuidePhysical Market
The primary role of the Metal Bulletin Iron Ore Indices is to provide market participants with a fair and robust representation of the physical iron ore spot market.
Our methodology and index specifications are designed to do just this. The MB methodology provides users with a robust price for iron ore.
As a result, the index can be used by market participants to fulfil a number of functions.
The global benchmark pricing system in iron ore ended in 2009 and since then the vast majority of transactions linked to spot prices.
This development has brought with it a number of new challenges, most noticeably, the issue of price discovery. By using the Metal Bulletin Iron Ore Indices, market participants can be confident in a market leading methodology.
Market negotiations often rely on a robust iron ore price to act as a benchmark that both counterparties are confident that they can trust, and one that is accepted throughout the market.
A number of contracts are based on the average of spot prices over set frequencies. The Metal Bulletin Iron Ore Indices are being used as the basis for this price and both buyers and sellers recognise the robustness of an index based on transactions that have actually happened and the advantages this brings.
Obviously the vast majority of material traded globally is not the same as the index basis. As a result, an adjustment factor is often agreed between buyer and seller in order to compensate for any material difference in the iron ore being traded. In this situation MB can assist subscribers by providing specific adjustment factors based on our value-in-use normalisation curves.
Financial Market
The Metal Bulletin Iron Ore Indices have been produced to meet the requirements of the financial market as well as the physical market.
There are a number of key requirements that the Metal Bulletin Iron Ore Indices satisfy for use in the financial market. They include that the calculation of the index is a repeatable, mechanistic process with removal of human judgment, and one that is fully auditable.
The volatility that now exists in iron ore spot prices has led to the development of a financial market in iron ore that continues to see rapid growth in both liquidity and breadth of use, allowing hedging and risk management.
The Metal Bulletin Iron Ore Indices can be used to settle OTC swaps and also acts as the settlement price for the first global iron ore futures contracts on the Singapore Mercantile Exchange (SMX).
Details of the contract can be found on page 17.
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MBIOI 62%, 58% and 58% Premium, Fe Fines CFR Qingdao
The MBIOI62 is a benchmark price representing the iron ore fines market. All prices within the specification maximums below, are normalised to the base specification based on the value-in-use implied by the market. The MBIOI62 is a daily index published at 12pm London time.
The MBIOI58 is a price representing a growing part of the iron ore fines market. All prices within the specification
MBIOI - 62
Price US$ per dry metric tonne, CFR ChinaFe Content Base 62%, Range 56% to 68%SilicaBase 3.5%, Maximum 6.0%AluminaBase 2.0%, Maximum 4.0%Combined Silica / AluminaMaximum 8.0%PhosphorusBase 0.05%, Maximum 0.10%SulphurBase 0.02%, Maximum 0.05%Loss on Ignition (%DW)Base 4.7%, Maximum 9.8%Moisture Base 8.0%, Maximum 10.0%GranularityBase Size >90% < 6.3mm, Maximum Size >90% <10.0mm, Minimum Size <10% <0.15mmTrade SizeMinimum 30,000 tonnesPayment TermsPayment at sight, other terms normalised to basisDelivery PortBase Qingdao-Rizhao-Lianyungang, normalized for any Chinese mainland sea portDelivery periodWithin 8 weeksPublicationDaily at midday London time
MBIOI - 58
PriceUS$ per dry metric tonne, CFR ChinaFe ContentBase 58%, Range 56% to 60%SilicaBase 5.5%, Maximum 8.0%AluminaBase 3.5%, Maximum 5.0%
PhosphorusBase 0.08%, Maximum 0.10%SulphurBase 0.04%, Maximum 0.07%
MoistureBase 8.0%, Maximum 10.0%GranularityMaximum Size >90% <10.0mm
Trade SizeMinimum 30,000 tonnesPayment TermsPayment at sight. other terms normalised to basisDelivery PortBase Qingdao-Rizhao-Lianyungang, normalized for any Chinese mainland sea portDelivery periodWithin 8 weeksPublicationDaily at midday London time
MBIOI – 58P (High Grade)
PriceUS$ per dry metric tonne, CFR ChinaFe ContentBase 58%SilicaBase 5.5%AluminaBase 1.5%
PhosphorusBase 0.05%SulphurBase 0.01%
MoistureBase 8.0%Granularity>90%<10.0mm
Trade SizeMinimum 30,000 tonnesPayment TermsPayment at sightDelivery PortQingdao
Delivery periodWithin 8 weeksPublicationDaily at midday London time
Index Specifications
maximums below are normalised to the base specification based on the value-in-use implied by the market. The MBIOI58 is a daily index published at 12pm London time.
In addition to the MBIOI58, Metal Bulletin publishes a daily differential premium for the 58% Fe high specification; low alumina and phosphorous material (MBIOI-58P).
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MBIOI 65% Fe Blast Furnace Pellet, CFR Qingdao – MBIOI-PT
MBIOI 66% Fe Concentrate, CFR Qingdao – MBIOI-CO
The MBIOI-PT is a benchmark price representing the iron ore blast furnace pellet market. All prices within the specification maximums below, are normalised to the base specification based on the value-in-use implied by the market. The MBIOI-PT is a weekly index published Friday at 12pm London time.
Index Specifications
MBIOI-PT
PriceUS$ per dry metric tonne, CFR ChinaFe ContentBase 65%, Range 60% to 70%OriginsAll OriginsSilicaBase: 4.5%, Maximum: 6.0%AluminaBase: 0.4%, Maximum: 0.8%PhosphorusBase: 0.03%, Maximum: 0.05%SulphurBase 0.01%, Maximum 0.02%MoistureBase 2.0%/DW, Max 3.0%/DWGranularityMaximum Size >90% >10.0mmCompression StrengthBase 250daN, min 200daNTrade SizeMinimum 10,000 tonnesPayment TermsLC on sight- other payment terms normalisedDelivery PortBase Qingdao-Rizhao-Lianyungang, normalized for any Chinese mainland sea portDeliverySeaborne Imports- within 8 weeksPublicationFriday at midday London time
MBIOI-CO
PriceUS$ per dry metric tonne, CFR ChinaFe ContentBase 66%, Range 63% to 70%OriginsAll OriginsSilicaBase: 4.5%, Maximum: 9.0%AluminaBase: 0.5%, Maximum: 2.0%PhosphorusBase: 0.02%, Maximum: 0.06%SulphurBase 0.03%, Maximum 0.10%TitaniumBase 0.05%, Maximum 0.30%MoistureBase 8.0%/DW, Max 11.0%/DWGranularityMaximum Size >80% <0.15mm. Undersize maximum 20%<0.05mmTrade SizeMinimum 10,000 tonnesPayment TermsLC on sight- other payment terms normalisedDelivery PortBase Qingdao-Rizhao-Lianyungang, normalized for any Chinese mainland sea portDeliverySeaborne Imports- within 8 weeksPublicationFriday at midday London time
The MBIOI-CO is a new benchmark price representing the iron ore concentrate market. All prices within the specification maximums below, are normalised to the base specification based on the value-in-use implied by the market. The MBIOI-CO is a weekly index published Friday at 12pm London time.
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MBIOI Value-In-Use Index - MBIOI-VIU
Introduction
Metal Bulletin’s new US Dollar % Fe Value-in-Use (VIU) Index is a unique reference of the relationship between each percentage point of iron content and its price on a $/tonne CFR Qingdao basis in the iron ore spot market and relative to the 62% Fe Index MBIOI62. The MBIOI Fe VIU Index is published monthly and is based on actual spot market transactions normalised to $/tonne CFR Qingdao over the past month.
The relationship between price and chemistry in the iron ore market is a complex one, and is acknowledged to be non-linear. However, analysis of the spot market data shows that a linear relationship between price and iron content can be applied within certain ranges while maintaining statistical validity. This $/Fe factor is applied to the MBIOI62 index as a differential adjuster.
MB recognises that the use of a linear adjustment does not give the full relationship, and that a number of other factors need to be taken into account. This includes other chemistries and physical properties. The Index is intended as a reference price adjustment, all other factors being equal.
The Index utilises data from all countries. Analysis of historical data shows that the difference in the shape of the curve between countries, at the time of publication, is not significant. However, this does not mean that there is no price difference between countries. What it means is that, on average, the spot market applies a similar premium (or discount) to the iron content regardless of the country of origin. The absolute price of the iron ore is based on a wide range of additional factors, including chemistry, physical parameters, and various soft factors.
Fe Value-in-Use Index Application Formula
Price of Iron Ore at Grade XX% = MBIOI62 + (% Fe difference from 62% Fe * MB Fe VIU Index)
The MB Fe VIU Index is not a $/dmtu calculation. It is not possible to multiply the Fe content by the Fe VIU Index to calculate the price of iron ore. The MB Fe VIU Index must be used as a differential from the MBIOI62 Index.
Index Calculation Methodology
The MB Fe VIU Index is a statistical regression calculation on the relationship between iron content and price of the actual spot market transactions that have been seen over the past month. The data analysed in the index is the data that is used in the calculation of the MBIOI62 (for more details see the section on Iron Ore Index methodologies.)
Using regression analysis, outlier data points are excluded from the index calculation and the index recalculated. The data used to obtain the index number are actual deals within the reference month. In the event that there were not sufficient deals within a month, assessments from market participants would be included in the index calculation following the same specifications and methodology.
The Index is published monthly, and is calculated at the same time as the normalisation curves are recalculated for the Iron Ore Index.
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MBIOI Price Consultancy
Metal Bulletin Indices provides tools to subscribers to help determine the value of different grades of iron ore on the spot market
By using the extensive proprietary data series based on the value-in-use of fines in the iron ore spot market, MB is able to determine what the implied value of a specific material is at current market / index levels.
Almost all material differs in some way from the index specification, and typically those price adjustments would be done on a bilateral basis between the buyer and seller. The MB model works by applying the value-in-use relationships in reverse from the current index value.
MB has logged the relationships between iron content, other chemistries and other soft factors which determine a material value-in-use. In order for market participants to be able to appropriately determine what a specified material may command on the spot market it is vital that such factors are taken in to consideration.
Value-in-use calculations take into consideration the soft factors that would be missed by valuing iron ore on a bottom-up chemistry basis. Many market participants place different values on material above or below what the physical specification may suggest. These values are captured in the MBIOI pricing models.
Price: The basis of the price is delivered to China - $/dry metric tonne CFR Qingdao. By using the latest freight rates and our in-house freight adjustment model we are able to take data on a variety of bases including FOB and CIF and provide an implied CFR price. Spot deals to any Chinese mainland port can be adjusted to our base port of Qingdao using the latest freight rates and our in-house freight adjustment model.
Fe Content: MB can use material of any Fe content between 56% and 68% with other specifications in range. Outside of this range the relationship is less significant and so price representation becomes more difficult. Nevertheless, relationships continue to exist and representative prices may still be provided if required.
Other Chemistries: Beside Fe content, a number of other chemistries can greatly affect the value-in-use of a material. Using our model, we can calculate what impact these chemistry variations have on the value-in-use of a given material and what impact this has on the price that they can command on a spot basis.
Physical properties: As with other chemistries, different physical properties can greatly affect the value-in-use of a material. Using our model we can examine what consequence these physical property variations have on the value-in-use of a given material and what impact this has on the price that they can command on a spot basis.
Material origin: Beyond the chemistry a material possesses, its value-in-use is determined by a number of other factors. These include reputation, business relationships and reliability of supply for example. Our value-in-use model captures the price that different materials have commanded beyond that expected from the specific chemistries of the material involved. We are able to use material of any origin and determine what the market suggests its value is on a CFR China basis based on previous relationships.
Making use of this service
Subscribers to the Metal Bulletin Iron Ore Indices are able to utilise this service on a consultancy basis. By providing material specifications and origins to the Metal Bulletin Iron Ore Index department on a confidential basis, we are able to use our in house value-in-use curve to provide details of what our model suggests the material can command on a spot market basis at any given price level.
Note: MB is unable to say what any material is necessarily worth on a spot basis. This depends on a number of factors unique to every buyer and seller. This price consultancy can only state what our value-in-use curves suggest a material would commanded on a spot basis.
Metal Bulletin | 13
About the Iron Ore IndexMetal Bulletin is a leading independent supplier of market intelligence and pricing to the global metals industries. MB’s Iron Ore Indices are an objective representation of the seaborne merchant market for sinter fines delivered to China. The indices are based on actual transactions, which are reported to MB by any market participant who is conducting trades on a CFR China spot basis. MB is totally impartial, and seeks to report an open and transparent representation of the market. MB has no financial interest in the level or direction of the index.
Is my data secure?Data supplied to MB is stored in a secure system, with strictly controlled and limited access. Data on trades is not accessible to other divisions of MB. Contributors will be able to submit data through a secure logon and link on the website, or via email to a dedicated email address.
Will other market participants be able to work back to my data?The only number that is published is the final calculated index, which is a composite index number from a population of normalized trade data. It is not possible back calculate data without already knowing the full data of every trade. In addition, the methodology utilizes three sub-indices, one for each group of physical market participants, which are then combined on an equal weighting. This further increases data security.
Who is the index for?The index will be of interest to all market participants, both in the physical and financial markets.
Who can contribute to the index?All physical market participants who are engaged in the CFR China port iron ore spot market are encouraged to participate. Material of all origin will be accepted, and included in the calculation, provided it meets the chemical, physical, and delivery specifications outlined in the methodology.
Why use three sub-indicesThis reduces any bias between the different market participant groups, which may occur due to the timing of data reporting for example.
How do you balance the market influence?The model uses MB’s established Index methodology, which is recognised as the most representative by the marketplace. The model has a series of checks to make sure that all sides are equally represented. Three sub-indices are created, based on a tonnage-weighted calculation of actual transaction data supplied by producers/ consumers/ traders, which are then equally weighted. This ensures that all sides are represented without bias.
What about outlier data?The model rejects any data point that is more than 4% away from the calculated index, and recalculates the model to one iteration. This removes unrepresentative material as well as mistakes and attempts to unfairly influence the outcome.
FREQUENTLY ASKED QUESTIONS
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What about small but unrepresentative deals?The model is tonnage weighted, so these types of deals do not have a major influence. If they are more than 4% away, they are rejected completely.
Why should I report data?Supplying data will ensure that the model reflects the market. The model is open to data from all market participants in the iron ore spot market. It is not restricted to a closed group or price setting panel.
What about deals that are not basis Qingdao?MB uses the latest freight rates, supplied by leading global freight brokers, to normalise transactions for another port to the index basis.
Why are some indices daily and some weekly?Our index is a mechanistic model process which removes subjectivity, rather than an assessment process which relies on human judgment. This then requires good liquidity of data to conduct a meaningful statistical analysis. When transaction numbers are limited the indices use data collected from across the week. Once sufficient transaction numbers exist an index c an be calculated daily.
How do you deal with different chemistries / grades?Different material grades are normalised in the model based on the value-in-use implied by the market over the preceding month. This increases liquidity at the base specification, and shows movements in the underlying market.
How did you derive the base grade(s) used in your indices?We have spent significant time in consultation with all sides of the market. Initial draft specifications, which are typically aimed at the most liquid and representative grade, are issued to the market for comment before finalisation.
How many spot trades are captured in the daily index?We capture between 20 and 30 data points daily for the MBIOI 62.
How many respondents does the Index use?The list of potential respondents includes the whole spectrum of physical market participants. Naturally, only a proportion will be active in the market on any one particular day. This involves contacts via our offices in Shanghai, Singapore and London, as well as Steelhome contacts with whom we have a partnership. Steelhome are a Chinese firm that specialise in pricing for the steel industry. Like MB they are independent and provide pricing, news, research and conferences. This partnership allows us to utilise their expertise in the Chinese domestic market through their contacts on top of those provided by our own shanghai office. We also have a number of confidentiality agreements with producers, consumer and traders who want to have their deals represented in the index but wish the transactions to remain confidential.
How does your index allow for market structure with such a high concentration of sellers?The sub-indices are based on a tonnage weighted calculation of actual transactions normalised for iron content and freight. The final index is the non-weighted average of the three sub-indices, allowing for equal representation from all sides of the market, and also counters market distortion or cherry-picking of data. Only the final index is published.
All data points that fall greater than 4% away from the calculated index are excluded, and the index recalculated once.
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Outliers will be investigated, and attempts to influence the index unfairly will result in the data provider being warned or excluded.
The pure spot market is not as concentrated as the contract market, with a long tail of suppliers. These include India, Iran, South Africa, Brazil, Australia, Venezuela, Indonesia and Thailand. Ultimately, we aim to reflect the market, so the concentration of sellers does not affect the index.
What is your methodology for calculating normalisation coefficients?The data is normalized using our in-house model based on the value-in-use applied by the market to different material grades, to a single iron content (62% Fe) and using the latest freight rates supplied by one of the leading brokers to a single port (Qingdao).
We do not impose premiums or discounts ourselves, we allow the market to do that and we reflect that going forward. Perceived discounts and premiums belong to the Chinese market and we simply reflect those. We have different curves for different materials and origins as appropriate. The value in use of the material is reflected in the premium and discounts for different grades, over and above the linear relationship between the iron content and the price. The overall relationship is not linear. The majority of material fits on the same curve from 56% to 68% Fe, albeit with a different starting point.
How are freight rates addressed in the normalisation process? Is this done on a CFR basis or underlying FOB basis?The index is produced on a CFR basis. Normalisation occurs with regard to the port of delivery relative to our base port Qingdao. There is up to five days sailing time between ports in China, and as such, this can greatly affect the value in use that the consumer place on a particular transaction. If the port is further north then a figure is subtracted from the official price to normalise it to Qingdao. Ports further south have a figure added on the transaction price. The actual number that is added or subtracted is calculated daily using freight figures received from a leading international shipping broker. We also take into account the different routes taken along with different handling costs that exist at different locations. This gives us a very accurate figure that changes automatically with the freight rates.
How do you deal with trades reported using a long-term freight commitment compared to a spot freight rate?No adjustment. Freight is up to supplier or consumer. Any advantage or disadvantage is the issue for the supplier as we are not speculating to or from FOB prices.
How frequently are your normalisation coefficients re-calculated?Monthly. This provides us with an excellent statistical analysis.
How are actual quality variances reported when trades are advised on the basis of indicative/expected specification?Trade is done on expected delivery specifications. This is what the trade is settled on – if it turns out to be different then that is an issue between the two parties who agreed the contract, and who would typically have agreed penalties etc. The index is not back adjusted.
What is not captured by the normalisation process, brand, synergies, other…?Some brands will have different values given to them. Our index represents an accurate underlying value of the market and as such the price can be settled against our price either at a premium or discount as felt appropriate by the parties concerned. Because we are using the market defined value-in-use, we capture all factors, including chemistry and soft factors.
Metal Bulletin | 16
SMX MBIO Index (Iron Ore) Futures ContractThe world’s first global iron ore futures contract settled against Metal Bulletin Iron Ore (MBIO) Index, 62% Fe, CFR Qingdao.
Need to hedgeThe production and sale of iron ore is concentrated across several very large as well as numerous medium sized producers. The breakdown of the annual benchmark system has led to the development of much shorter term pricing based on the existing spot market. Till recently, the mining majors have shifted to shorter quarterly contracts.
The SMX MBIO Index futures contract goes hand-in-hand with the evolving spot market for iron ore. Spot pricing exposes producers, consumers and traders to price volatility and thus from the perspective of physical market participants there is a growing need to hedge this spot price exposure.
Why trade the SMMBIO Futures contract?Ease of access•Robust Index – reduced basis risk•Tighter quotes•Reduced cost of trading•Direct screen trading•Efficient monitoring of open position•Settlement on month-end spot price•
Metal Bulletin Iron Ore IndexThe Metal Bulletin Iron Ore (MBIO) Index is a tonnage weighted calculation of actual transactions normalized on iron ore content and freight to 62% iron content, CFR Qingdao, China.
Metal Bulletin is completely impartial and seeks to report an open and transparent representation of the market. The MBIO is the only index to evenly represent all sides of the marIket and work with an integrated Chinese data provider in Steelhome.
For more information on the SMMBIO futures contract and its accessibility please contact:
Prakash Shah [email protected] President – Product Strategy +65 6590 3709
Ronald D’Britto [email protected] Business Dev. & Marketing +65 6590 3756
SMX MBIO Index Futures Contract Specifications
Symbol SMMBIOTrading Unit 100 times MBIO Index pricePrice Quotation Basis US dollars to two decimal places (e.g. US$ 145.60)Tick Size US$ 0.10 (US$ 10 per contract)Trading Hours 1000 to 2000 SGT (1900 SGT during British Summer Time)Contract Months Current month and 5 consecutive monthsLast Trading Day Last Business Day of the maturing contract monthSettlement Cash (for EFP see note overleaf)Final Settlement Price The Final Settlement Price will be the MBIO Index as published by Metal Bulletin Limited on the Last Trading DayGrade/Quality Index data normalised to 62% Fe IronOre, CFR QingdaoCommodity Group Index
For more information on the MBIO Index computation please contact:
Cameron Hunt [email protected] +44 (0)207 827 6432
Christopher Ellis [email protected] + 44 (0)207 827 6482
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Frequently Asked Questions on SMX MBIO Index FuturesHow significant is price risk in iron ore spot market? Activity in spot iron ore trading is seen to be rapidly increasing based on rising demand for iron ore and increased volatility in spot prices reflecting current demand and supply in the market. The traditional long-term contracts have been largely replaced by quarterly contracts and hence volatility in the spot iron ore market is playing an increasingly important role for the miners, steel mills, traders, stockholders, fabricators and end users.
What are the advantages of SMX MBIO Index futures contract over OTC swap contracts?The MBIO Index futures contract offers a narrower bid-ask spread giving better pricing and trading efficiency to the •iron ore physical traders and financial players.The futures contract offers an easy entry and exit at any point of time to every participant based on their position in •the market and price views.As the iron ore physical market is slowly moving towards spot pricing, the end of the month one day settlement of •the futures contract based on spot index is a better product for those who are operating in the spot market.The screen based trading system provides transparency and confidence to the market participants.•The cost of trading on the futures market is considerably lower as it is an electronic trading system with seamlessly •integrated trading, clearing and settlement operation.
How can I trade the SMX MBIO Index futures contract?One may trade on SMX platform either as a Trading Member or as a client of a Broker Member or General Clearing Member. The list of SMX Membership categories, eligibility criteria and privileges are on the SMX website www.smx.com.sg. To trade as a client, an entity has to open a trading account with one of SMX’s Broker Member or General Clearing Member.
How do I access the trading screen? Do I need any additional equipment?The trading screen is available via an internet log-in on any internet-enabled computer. There is no requirement for additional equipment .
How much does it cost to access the view only screen? The view only screen is completely free. To get access to a view screen please contact SMX on [email protected].
Is the SMX MBIO Index futures contract physically delivered? No. The contract is cash settled against the MBIO Index on the last day of the month. However, the contract does allow the use of an Exchange of Futures for Physical (EFP) mechanism, to be agreed on a bilateral basis. The full procedure and requirements are detailed in SMX Notice 3006, available on the SMX website www.smx.com.sg.
Disclaimer: This material is published for general information and circulation only and does not constitute professional advice or have regard to the specific investment objectives, financial situation and the particular needs of any specific person or prospective investor. It is not intended to constitute an offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction or be calculated to be an intended offer or a reference to an intended offer or be the basis for encouraging investment decisions to be made. Investments are subject to risks and uncertainties including, but not limited to, loss of original investment amount and profit. Potential investors should obtain independent financial and professional advice before making any investments. Singapore Mercantile Exchange Pte. Ltd. does not guarantee the accuracy or completeness of information contained in this material and accepts no liability and/or responsibility for any loss or damages of any kind arising from any use of or reliance on any of the opinions expressed or information herein. Opinions expressed are subject to change without notice.All rights reserved. Copyright © 2010 Singapore Mercantile Exchange Pte. Ltd. (Company Reg. No. 200617072D)
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Prices and other information are obtained by Metal Bulletin from various sources believed to be reliable. This information has not been independently verified by MetalBulletin. Those prices and price indices which are evaluated or calculated by Metal Bulletin represent an approximate evaluation of current levels based upon dealings (if any) that may have been disclosed prior to publication to Metal Bulletin. Such prices are collated through regular contact with producers, traders and purchasers although not all market segments may be contacted prior to the evaluation, calculation, or publication of any specific price or index. Actual transaction prices will reflect quantities, grades and qualities, credit terms, and many other parameters. The prices are in no sense comparable to the quoted prices of commodities in which a formal futures market exists.Efforts are made to ensure that pricing information is representative, but because of the possibility of human or mechanical error by our sources, Metal Bulletin, or others, Metal Bulletin does not guarantee the accuracy, currentness or completeness of any published information. Neither Metal Bulletin nor any of its providers of information make any warranties, express or implied, as to the results to be obtained from use of this publication, and make no express or implied warranties of fitness for a particular purpose or use. Metal Bulletin is not responsible for errors or omissions, or for the results obtained by the use of such information or for any decision made or action taken in reliance on such information or for any consequential, special or similar damages, and Metal Bulletin disclaims any liability to any person for any loss or damage caused by such errors or omissions, use or decision, including those arising from the negligence of Metal Bulletin, its employees, or representatives. Evaluations or calculations of prices and price indices by Metal Bulletin are based upon certain market assumptions and evaluation methodologies, and may not conform to prices or information available from third parties. There may be errors or defects in such assumptions or methodologies that cause resultant evaluations to beinappropriate for use. Metal Bulletin is not an investment advisor, a financial dvisor or a securities broker. The informationin this publication has been prepared solely for informational and educational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, commodity or instrument or to participate in any particular trading strategy. Such information is intended to be an aid to your own investment process and your investment actions should be solely based upon your own decisions andresearch.
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For more information about the Metal Bulletin Iron Ore Indices and how they can help you, please do not hesitate to contact the Index team:
London
Cameron Hunt - [email protected] | +44 (0)20 7827 6432
Christopher Ellis - [email protected] | +44 (0)20 7827 6482
Inaki Villanueva - [email protected] | +44 (0)20 7827 6468
China
Xiaolei Xu - [email protected] | +86 21 5877 0857
Ginger Ding - [email protected] | +86 21 5877 0855
Mini Zhao - [email protected] | +852 2842 6994
Australia
Ben [email protected] | +61 3 5221 0715
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