Analysis: Quality adjustments stabilise iron ore trade

The Argus ICX, the price for 62pc fines cfr Qingdao, has traded in a narrow range of $60-70/dry metric tonne (dmt) for most of this year, prompting traders to complain that the market is boring. But across grades and brands, the market has been anything but, requiring large swings in quality adjustments so that trades are captured by the index.

Brazilian 65pc Fe fines have soared to a 40pc premium to the ICX, while discounts for low-grade 56-57pc Fe fines have widened by the same degree. Within the medium-grade space, discounts for brands Jimblebar fines (JMBF) and Mac fines (MACF) have widened, while the Brazilian 63pc Fe BRBF brand has moved from a discount to a wide premium.

These kinds of moves have required increased transparency to support 62pc index formation and prevent spot trade from splintering into smaller pools of liquidity.

Spot trade participation has become more consistent beyond mainstay Rio Tinto's PB fines (PBF). This has helped inform published quality adjustments and transparent brand normalisations that have allowed the market to track market relationships, reducing volatility in brand differentials to align 62pc mainstream trade.

This was not possible a year ago when brand relationships were less transparent. Now, even with 62pc fines brands trading across a nearly $20/t spread, the bulk of spot trades feed into the Argus ICX.

Argus began publishing value-in-market (ViM) iron ore quality adjustments for the 62pc fines market in 2017. The adjustments allow a wide range of trades to be adjusted back to the index specification brands to the ICX base specification of 62pc Fe, 3.75pc silica, 2.25pc alumina, 0.1pc phosphorus and 8pc moisture. Both fixed price and floating basis trades are used, with the latter converted to a fixed price using the forward curve. The ICX delivery window is two to eight weeks, with all prices adjusted to week four using the shape of the forward curve.

On 6 September four different brands traded and a fifth had a matched bid-offer on screen, all on the same day. A BRBF trade at $75.30/dmt 62pc basis normalised to $69.56/dmt with timing and quality adjustments. Two floating basis PBF trades at a 10¢/dmt discount to 62pc index and flat to 62pc index normalised to $68.73/dmt and $68.59/dmt respectively. A JMBF trade at a $10.30/dmt discount to index normalised to $66.06/dmt, while a MACF trade at a $4.60/dmt discount to October index normalised at $67.85/dmt. A platform $68.55/dmt-$69.30/dmt bid-ask pair for NHGF 62pc basis normalised to $68.88/dmt-$69.63/dmt.

Argus ViM adjustments for impurities and brands allow products as diverse as JMBF and BRBF with a $17.75/dmt ViM quality difference between them to feed into the ICX index. JMBF has a ViM-derived discount of $10.57/dmt to the ICX, while BRBF has a ViM premium of $7.18/dmt the ICX.

A spike in alumina penalties have been the main driver boosting BRBF premiums to other brands. The Argus alumina adjustment at $4.60/dmt per 1pc Al2O3 has increaed from 50¢/dmt in January when 62pc Fe basis BRBF was adjusted at a discount to the ICX. An increase in the phosphorus adjustment from $1.25/dmt for every 0.01pc P above 0.1pc in January to the latest $3/dmt has been the main driver of JMBF's ViM discount to $10.57/dmt below ICX.

Argus also began publishing brand prices for PBF, NHGF, BRBF and SSF in 2017. Portside trade is liquid and transparent, but the non-standardised localised markets have limitations in factoring into indexes. Portside brand price relationships can be affected by differences in quality and blending practices, local supply conditions, varied port fees and different payment terms.

Portside trade has to a limited degree factored into seaborne contract adjustments. Australian mining firm Fortescue sets monthly adjustments for SSF that generally track its portside discounts, but this has been more the exception than the rule. Seaborne iron ore contracts have always linked to indexes set by seaborne spot trade using established methodologies, reporting standards and transparency.