The moves follow the announcement from Brazilian producer Vale late last year that it was switching its pellet contracts for this year to a 65% Fe iron ore index, moving away from the previous practice of using a 62% Fe iron ore index as the base index for settlement of pellet contracts.
The miner said at the time that because pellet prices are linked to steel mill productivity, “by switching [our pellet pricing] to 65% Fe iron ore index there will be a natural hedge for furnace [operators] to tackle [their] productivity needs.”
The shift in 2019 pellet contracts to be based on the Fastmarkets MB 65% Fe iron ore index aligns with the evolving pricing needs of the iron ore market, which in recent years has seen participants calling for price references that are more closely aligned to product category.
These calls resulted in Fastmarkets MB launching a 62% Fe iron ore low-alumina index in August 2018
as the gap between mid-grade ores expanded based on the raw material’s alumina content.
The shift in pellet pricing to a 65% Fe iron ore index base also follows the launch of adequate risk mitigation tools for the iron ore market related to their high-grade sector exposure.
On December 3, 2018, Singapore Exchange (SGX) became the world’s first exchange to launch a high-grade iron ore derivative contract that has provided participants with a more seamless mechanism to manage their high-grade sector exposure, compared with the earlier derivative tools for mid- and low-grade iron ore.
The use of pellets in steel production provides similar benefits as the use of high-grade iron ore, including driving productivity.
Fastmarkets MB 65% Fe iron ore index stood at $95.60 per tonne cfr China on Wednesday March 20, down by $2.30 per tonne cfr China from a day earlier. The index averaged $90.41 per tonne cfr China in 2018, up from $88 per tonne cfr China the previous year.