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- The correlation between high and low-grade iron ore prices has declined this year amidst a wave of low-grade supply growth. This has led to higher basis risk for market participants hedging lower grade seaborne cargoes.
- While the existing 62% Fe price is likely to remain the primary benchmark iron ore price, the importance of a supplementary lower grade iron ore benchmark price is rising. Lower grade iron ore now accounts for about a quarter of the overall seaborne market.
- BHP Billiton’s Yandi fines, one of the most established low-grade iron ore brands, is priced off Metal Bulletin’s premium 58% Fe index. The lower correlation between high and low-grade iron ore prices coupled with greater lower grade volumes in the market should drive more low-grade brands to transition to a 58% Fe index moving forward.
- SGX will launch two new 58% Fe derivative products in early 2015 (based on Metal Bulletin and TSI low-alumina 58% Fe indices, respectively), supplementing our existing iron ore products which have seen volume growth at a CAGR of 138% over the past four years. Further, with a 60% margin offset available between the 62% Fe and 58% Fe contracts, this will enable capital-efficient spread trading opportunities across both contracts.
Growing divergence of high and low-grade prices
The correlation between high and low-grade iron ore prices has fallen this year. The 30-day rolling correlation between the 62% Fe and 58% Fe iron ore fines (CFR China) prices averaged 93% in H1 2014, though to date in H2 2014 this correlation has dropped to 86%. The 58% Fe price discount (relative to 62% Fe) blew out during the summer, reaching almost 20% as a wave of new low-grade supply flooded the market. Recently however this discount has narrowed to around 9-10%, which may be partly attributed to relatively weak underlying steel demand and tight credit in recent months.
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