How its Done: Iron Ore Trading in China

First, let’s start with the news regarding iron ore trading based on The Steel Index (TSI) spot pricing analysis as of this past Friday. TSI follows spot trading of 62% Fe fines as well as 58% Fe fines and prices are based on the port of Tianjin (China). According to TSI 62% Fe fines ended Friday down $3.90 to $91.80. For the month ore dropped $14.20/dmt or 13.4 percent and the $91.80 mark is the 52-week low.

Comments made in the TSI daily review as well as comments made to SMU by our trading contact pointed to trades that were made on Friday for June arrival out of Australia. The trades on 62% Fe were made at $90.50/dmt.

Shortly after the trades were made on Friday we received a note from our trader, “I really wonder if anyone is even considering that when Platts drops USD4/mt in one day, what that means in real USD to the China Ore Port Stocks. You have 112 Million MTS of Ore at the Ports and last week we were a little below USD100/mt CNF FO and today we are at USD90.50/mt CNF FO and multiply that drop by the amount of Ore in the Ports, and in just one week, you have a loss of 112 Million MTS x USD8/mt.  For argument’s sake, we say that some of the Ore will be converted into Steel and that is not a real loss, well, when Steel prices are dropping more than Ore prices, it becomes a nightmare, not a question of real loss, it could be doubled the USD8/mt just on Ore. Why do people think that the Ore is not being removed from the Ports, because the mills are making so much profit on finished Steel that they just want to leave it there or that they lose double or triple the amount if they produce Steel vs. leaving in the Port??”

Steel Market Update asked our ore and steel trader what was happening with steel offers out of the Chinese mills. We also wanted to know with ore piled up at the ports, who is taking the losses as prices drop?

First, his response regarding steel offers out of the Chinese mills:

It is a new world out there these days on Steel… Buyers of Steel are taking note of Raw material prices and the affect on the final steel product prices and they are now just waiting to see if the Steel Mills jump first on much expected lower prices which have not been announced yet. It is a cat and mouse game now between Mills and Buyers. Price ideas the mills are giving now are laughable and something I would not even send out to the buyers I have. On the other hand, asking for firm proposals from the buyers is also getting nowhere as they do not want to make any commitments, and saying we “MAY BE ABLE TO CLOSE IF” we were at this level of XXUSD/mt CNF FO, but the levels are USD20/mt below what the mills are giving.”

And then he provided us insights into how the iron ore business is conducted between the big mills and the large iron ore companies. We found the similarities between the domestic (USA) steel mills selling on an index “minus” basis very similar to what is happening between the ore companies and the big mills – at least when prices are moving lower:

“On the Ore email, what I was relaying John is what less value the Ore at the Ports are worth with such decreases. As for who takes a loss, anyone who sells a single Kilo of Ore today will be taking the loss and I really have no idea how much longer the Ore can remain in the ports without Companies going Bankrupt and/or Banks making the anticipated announcement of receivership and auctioning/selling of the cargos which are outstanding.

“Baosteel, Wisco, AnBen, etc. do open their own LC’s for Ore, John, and they pay for it, but this is probably today 50% less than they previously bought because they can buy the same Ore at the ports at discounted prices, better payment options, quicker delivery, less quantity, overall a much better deal than purchasing for a cargo arriving in 30 days. Don’t forget that large mines like Vale, BHP, Rio, all have Bonded Warehouse Ore Stocks as well which they sell domestically and the funds are wired directly overseas to the Mines or paid in RMB to the Mines Accounts in HK, Singapore, etc.

“All of the Mainstream Mines have fixed pricing John and it is based on a formula of “+/-5 Days Before/After NOR (Notice of Readiness) given at Discharge port less ___% against Platts (Discount  against Platts price).” That means when the Vessel arrives +/- 5 Days upon giving Notice of Readiness, then the price is FIXED against Platts level at THAT TIME and whatever the agreed discount. Then, the Buyer/Seller agree and the LC is paid on those Terms.”

SMU was not done asking questions. We wanted to know what the “normal” discount rate was for the larger mills:

“Unofficially, the Platts discount can be anywhere from 5% to 8% depending on what the Seller and Mill agree on at the time…When the Contract is signed, there is an LC opened John and like all Ore on the Water, the Mine/Seller own it until it is paid for, only with this type of Formula between the Mainstream Mines and the Chinese Buyers, it is slightly longer before they get paid. Normally the Ore stored in the Bonded Warehouses is that which was shipped without an LC in hopes of the Mines taking a position that the market would increase but didn’t and they could not get the price they INSISTED ON, yes, INSISTED ON, when the Vessel arrived in Chinese Waters, hence they brought in the vessel, discharged it into a Bonded Warehouse, and can sell it anytime they wish IF they can find a buyer now. Of course, the Bonded Warehouse costs are not cheap either.”

And we wanted to know who is on the hook for all of the ore sitting in bonded warehouses and reported to be approximately 112 million metric tons as of the end of this past week. How much of the iron ore is owned by the steel mills, traders, banks, etc.?

“No idea on the split of cargo owned by Traders, Mills, etc., but I can inform you that over 40-45% of the Ore in the Ports is owned by the Banks!! That should give you some idea of what is actually paid for… When you say Financed by Chinese or Foreign Banks, I assume you mean LC opened by a Chinese Bank or Foreign Bank?? It depends on the Seller or Buyer John as not all of the Ore is direct Mine to Buyer and there are EU, Indian, US Traders involved in a lot of Ore business and they open their own LC to the Mines and receive LC’s from China, HK or Singapore from the Buyers. That is probably 80% of the Ore business.  Of course, if the Mines sell direct, the LC goes from China, HK or Singapore direct the Miner’s Bank in EU (Normally) as that is where they have their Trading Operations.”

Our trading source, who represents iron ore coming from mines not owned or operated by the big three ore companies (Vale, Rio Tinto and BHP Billiton). He advised us that he too sells ore based on the formula provided above but, because they are not “so-called mainstream suppliers” they have to provide a larger discount unless the ore being sold is of better quality (higher Fe and lower moisture) or they have quicker delivery, etc.