Iron Ore Price Surges to New Annual High

The Steel Index (TSI) daily iron ore reference price hit its highest level in 12 months on Dec. 18, reaching $107.4 per dry metric tonne. This reference price, for 62% Fe content fines CFRFO China port, represents an 82% increase since March, when the price dipped to $59.1/dmt.

The price hit its previous high in August, before falling back sharply to $76.1/dmt in September. Since then prices have been volatile, with this week alone seeing an increase of 5.2% despite falling freight rates on the key routes into China.

“In my opinion, the levels we’ve seen in the spot market this week are as a result of tightness in supply and continued Chinese demand. I don’t see the market correcting for a least another week or two,” saif Jerry Yu a Hong Kong based trader. “It’s anyone’s guess what 2010 will bring.”

The volatility and rising spot price creates a challenging background for the forthcoming iron ore benchmark price discussions between the Chinese steel mills and miners for next year. At current freight rates, the spot price is some 45-50% higher than the FOB fixed contract price agreed between the Japanese steel mills and Rio Tinto in mid 2009. No agreement on a benchmark iron ore price was reached with the Chinese steel industry in 2009 and many are skeptical that any agreement is likely for 2010.

“In this environment miners, traders and steel mills are increasingly looking to index-based iron ore pricing arrangements, often in parallel with financial swaps to manage their price risk” said Steven Randall, Managing Director of TSI. “The growth in the use of iron ore swaps this year has been nothing short of spectacular. Over $500m of iron ore swaps have been cleared using TSI’s index over the past 7 months. No other commodity has seen this speed of take-up.”

TSI’s iron ore index is used for settling over-the-counter cleared swaps. The Singapore Exchange and LCH. Clearnet both offer cleared iron ore swaps contracts settling exclusively against the monthly average of TSI’s daily 62% Fe iron ore reference prices published in the expiring month.