The proposal follows feedback received during a two-month extended open consultation on Fastmarkets' iron ore methodologies that a change to introduce a more direct mechanism for the incorporation of floating price - or index-linked - trading activity would be of value to the market. This proposal, if adopted, would constitute a material change to Fastmarkets’ iron ore index methodology.
Fastmarkets’ current approach for the incorporation of floating-basis price discovery information consigns responsibility with its approved market sources to evaluate what these trades imply for fixed-price tradeable levels. Sources are asked to submit their own conversions, which Fastmarkets then includes as indication data points weighted at the minimum tonnage specified for the given index. This approach facilitates indirect incorporation of index-linked price discovery information, while also appreciating the potential for different interpretations due to the procedural assumptions in referencing futures prices in the conversion of floating-basis trades to fixed-price equivalents.
But Fastmarkets recognizes the limitations of this approach with respect to the transparency of data inputs and the predictability of the index calculation.
Under the new proposal, Fastmarkets would calculate its own fixed-price equivalents of floating-price deals - applying a transparent method referencing Singapore Exchange (SGX) forward curves - and include these data points in its tonnage-weighted average index calculations at 50% of their reported tonnage. The calculation of fixed-price equivalents of index-linked spot activity would reflect the premium or discount quoted to the forward price of the underlying index, referencing the average traded forward prices on the SGX one hour prior to the spot transaction time, and normalizing if necessary to a cargo arrival time of five weeks by linear adjustment of the SGX forward curve.
Importantly, Fastmarkets would still continue to consult its approved market sources on a daily basis to obtain their views on the validity of its floating-to-fixed conversions. If a source agrees with the conversion, then they would not be asked to submit their own indication of that product’s tradeable level. On the other hand, if they disagree, they would be invited to submit their own conversion, which would be treated as an additional indication data point weighted at the minimum tonnage specified for the given index.
With this proposed refinement, Fastmarkets aims for its methodology to better reflect the following principles:
Fixed-price deals represent the "gold standard" in price discovery data points and therefore receive the highest weighting in index calculations.
- Although there are assumptions required in converting floating-price deals to fixed-price equivalents, they are also valuable price discovery data points. They constitute higher-quality pricing inputs than indications based solely on opinion and should therefore be weighted more highly in the index calculations.
- As with fixed-price deals, the impact of floating-price activity should be tonnage-weighted such that a larger volume transaction has a greater influence on the index calculations than a smaller one.
Although this proposal would constitute a structural change in methodology, it is not anticipated that there would be any discernible change to the price levels reflected by Fastmarkets’ indices. This is a reflection of the way in which floating-price information is already incorporated indirectly via indication data points under its existing approach.
The proposed change will be applicable to following indices.
Iron ore 65% Fe Brazil-origin fines, cfr Qingdao, $/tonne MB-IRO-0009
Iron ore 62% Fe low-alumina fines, cfr Qingdao, $/tonne MB-IRO-0144
Iron ore 62% Fe fines, cfr Qingdao, $/tonne MB-IRO-0008
Iron ore 58% Fe fines high-grade premium index, cfr Qingdao, $/tonne MB-IRO-0017
Iron ore 58% Fe fines high-grade premium, cfr Qingdao, $/tonne MB-IRO-0016
Iron ore 58% Fe fines, cfr Qingdao, $/tonne MB-IRO-0015
The consultation period for this proposed change starts on Monday April 5 and will end on Wednesday 30 June. The changes will take place, subject to market feedback, on Thursday July 1.
To provide comment or feedback on the content of the iron ore index methodologies, or if you would like to provide price information by becoming a data submitter to these indices, please email email@example.com with the subject heading "FAO: Peter Hannah, re: Iron Ore Methodology."
To see all of Fastmarkets’ pricing methodology and specification documents, go to: https://www.fastmarkets.com/about-us/methodology.