PRICING NOTICE: Adjustment of iron ore index methodology to include floating price data

Following a three-month consultation, Fastmarkets has adjusted its iron ore index methodology to increase the transparency and predictability of its process for incorporating “floating price” information.

This follows a proposal made in April for the refinement of the methodology to include data on floating prices – whereby the transaction price is determined by the index that a particular cargo is sold against.
Feedback received during the three-month consultation suggested that market participants welcomed the proposed methodology adjustment because it would increase the transparency and predictability of Fastmarkets’ indices by applying a more direct mechanism for the incorporation of floating price information.
Fastmarkets’ previous approach assigned responsibility to approved market sources to evaluate what these trades imply in fixed-price equivalents. Sources were asked to submit their own conversions, which Fastmarkets would include as indication data points weighted at the minimum tonnage specified for the given index.
With the adjustment to the methodology, Fastmarkets will now calculate its own fixed-price equivalents of floating-price deals by applying a transparent method referencing the Singapore Exchange’s (SGX’s) forward curves. These converted deal data points are then used in the tonnage-weighted average index calculations, weighted at 50% of their reported tonnage.
The calculation of fixed-price equivalents for index-linked cargoes in the spot market will 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 (up to a final window of 4-5pm for each day).
Feedback received during the consultation period suggested that normalizing laycan details to a base cargo expected arrival time (as proposed in our original pricing notice) was unnecessary.
Fastmarkets’ analysis also showed that there is weak evidence for a smooth physical forward curve structure beyond the differences between monthly quotation periods in the iron ore derivatives market.
Fastmarkets will refer to the SGX 62% Fe forward curve for iron ore products traded against a 62% Fe index or a basket of 62% Fe indices, and will refer to the SGX 65% Fe forward curve for iron ore products traded against a 65% Fe index.
If liquidity on the SGX 65% Fe forward curve is insufficient for a robust reference, Fastmarkets will refer to the SGX 62% Fe forward curve and adjust for the 65%/62% Fe differential using the latest difference between the SGX daily settlement prices for the 62% Fe and 65% Fe futures contracts.
For products traded against a 62% Fe low-alumina index or a basket of 62% Fe low-alumina indices, Fastmarkets will refer to the SGX 62% Fe forward curve and adjust for the differential using the difference between Fastmarkets’ 62% Fe low-alumina index and Fastmarkets’ 62% Fe index, or market participants’ indication of the differential if deemed more reflective.
Fastmarkets will still consult its approved market sources on a daily basis to obtain their views on the validity of its floating-to-fixed price conversions.
If a source agrees with the conversion, then they will not be asked to submit their own indication of that product’s tradeable level. On the other hand, if they disagree, they will 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 adjustment, Fastmarkets aims for its methodology to reflect the following principles:
Fixed-price deals represent the “gold standard” among price discovery data points and therefore receive the highest weighting in index calculations.
Although there are assumptions involved 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 transaction involving a larger volume has a greater influence on the index calculation than a smaller one.
While this adjustment constitutes a structural change in methodology, back-testing of the new approach suggests that there should not be any discernible change to the price levels reflected by Fastmarkets’ indices. This is due to the way in which floating-price information had already been incorporated indirectly via indication data points under the previous approach.
The methodology adjustment will apply to the 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

To provide 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: pricing@fastmarkets.com with the subject heading “FAO: Jane Fan, re: Iron Ore Methodology.”
To see all of Fastmarkets’ pricing methodology and specification documents, go to https://www.fastmarkets.com/about-us/methodology

Peter Hannah

phannah@fastmarkets.com

Published

Peter Hannah

July 01, 2021

03:06 GMT

Singapore