Promote The Formation of A More Rationale and Transparent Iron Ore Pricing Mechanism

Transcription

1 Promote The Formation of A More Rationale and Transparent Iron Ore Pricing Mechanism Dong Chaobin President of China Beijing International Mining Exchange February 27 th, 2013

2 目录 Exchanges are Effective Tools for Market- Oriented Commodity Pricing China Iron Ore Spot Trading Platform Off to a Smooth Start Prospects and Visions of China Iron Ore Spot Trading Platform

3 Evolution of Iron Ore Pricing Mechanism 铁矿石定价机制演变 Global iron ore supply was sufficient, and the trading means was mainly spot trading. Japan s steel industry showed rapid growth, and iron ore demand increased accordingly. Due to its heavy dependence on iron ore import, Japan became the main purchaser of Australian iron ore Europe and USA copied the experience of Japan by making use of the imported iron ore in large amount and signing the long-term agreements, leading to increasingly intense supply of the iron ore in the global market. To maintain their own interests, the iron ore exporting countries started strengthening their negotiation strength and changing the long-term agreements into the shortterm agreements in

4 Evolution of Iron Ore Pricing Mechanism 铁矿石定价机制演变 At this stage, the so called first and follow-up mode is adopted, and the pricing benchmark shall be based on the FOB term. Iron ore of the same grade shall have the same price increasing rate, therefore FOB, same growth rate Negotiation mechanism of iron ore was gradually stabilized and continued nearly 30 years till The negotiation was mainly held between the three major iron ore producers in the world and the large iron and steel enterprises in Asia and Europe. The ocean freight has largely increased since 2008, and the spot price has been far above the longterm agreement price, so the mines strive after more flexible pricing mode. 4

5 Evolution of Iron Ore Pricing Mechanism 铁矿石定价机制演变 The original annual benchmark pricing mechanism was changed into the quarterly pricing based on the CFR price. Thus, the annual iron ore pricing mechanism last for nearly 30 years changed violently. China Iron Ore Spot Trading Platform starts formal operation. Iron ore trade entered a new era The quarterly pricing was gradually abandoned by the mines and was shifted towards more flexible iron ore pricing strategy, which is dominated by the quarterly, monthly and even daily spot price based on the iron ore price index, and the spot trading mode has been accepted by the players of the market. Iron ore swap volume accelerated. Iron ore spot and derivative markets have started to show their effects on each other. 5

6 Advantages and Disadvantages of Long-term Agreement Pricing Advantages Stable relationship between suppliers and buyers Long term agreement benefits suppliers and demanders in arrangement of production plan and facilitate both parties in stable funding Reduce the risk management cost during the transaction Disadvantages High organization and time costs involved in joint negotiation Difficult to achieve the ideal negotiation outcome, with parties on demand side having different appeals for interests High probability of breaching when experiencing significant market fluctuation 6

7 The Methodologies Adopted by Existing Price Indexes are Controversial Assessment Index Trading Index Market Price Assessment Statistic Data Most of the existing iron ore price indexes are assessment indexes, instead of trading indexes. The index that truly reflects and provides guide on market movement shall be a weighted average of the actual real-time orders placed and transactions completed on the trading platform. 7

8 Index-linked Pricing Still Faces Manipulative Risks The sellers and buyers will agree upon a price index, the monthly average of which will be used as a reference, and the actual transaction price can be either at index, or at a premium /discount to it. Months Months Reducing price risks by using the index monthly average and setting price volatility limits Advantage Underlying Risk The existing indexes are manipulable. It s dependant on spot trading of very limited volume, and determines the price of long-term agreement. 8

9 Exchanges are Effective Tools for Market-Oriented Commodity Pricing The exchanges achieve higher effectiveness and lower trading costs, and eliminate trading risk, by forming a system with standardized trading process and contracts, as well as more open and transparent trading mode. Agriculture Chicago Board of Trade Metal London Metal Exchange Energy New York Merchant Exchange Founded in 1848, standard contracts introduced in 1865 Trading products include corn, cotton, cocoa, etc Founded in 1877, first trading copper and tin, then introduced lead, zinc, nickel, etc The most influential energy product exchange Trading products include crude oil, gasoline, natural gas, etc 9

10 Rationale and Transparent Iron Ore Pricing Mechanism Iron ore pricing mechanism is still evolving Provide opportunities to as many market participants as possible, comprehensively reflect the interests of all parties on the industry chain Sufficient, accurate and on-time information disclosure, effectively reduce the information asymmetry in the market, fulfill the market pricefinding function to the greatest extent Stable and reliable risk alerting and defending system, preventing abnormal price volatilities caused by manipulation Effective Market Participation Sufficient Information Disclosure Sound Risk Management System Rationale and Transparent Iron Ore Pricing Mechanism 10

11 目录 Exchanges are Effective Tools for Market- Oriented Commodity Pricing China Iron Ore Spot Trading Platform Off to a Smooth Start Prospects and Visions of China Iron Ore Spot Trading Platform

12 China Iron Ore Spot Trading Platform China Iron Ore Spot Trading Platform (Platform ) was jointly launched by China Iron & Steel Association (CISA), China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters (CCCMC) and China Beijing International Mining Exchange (CBMX) on January 16 th 2012, and started formal operation on May 8 th

13 Operating Philosophy of China Iron Ore Spot Trading Platform Core Feature The platform is the fourth party participating in the market, with neutrality and independence being the bottom line. Core Value The platform is the safeguard of trading regulations. Credit is the cornerstone. Core Competence The platform continues optimizing trading environment through technological innovation. Platform Core Product As a service provider, the platform provides the trading parties with professional, highly efficient, convenient and cost effective services. 13

14 Two Trading Modes Pre-matched counterparties trading, and performance deposit & cargo right pledge trading. Covers delivering cargo, bonded zone cargo, on-port cargo. According to different trading mode, dividability of trading quantity and settlement currency, the platform comprises of 6 trading boards, being board A to F. Board A to F adopt pre-matched counterparties trading, where a member shall select no less than 3 others as credit-matching counterparties in order to be matched for a transaction. No performance deposit required. Board E and F adopt performance deposit & cargo right pledge trading, where the buyer shall have sufficient fund (20% of contract value), and once the transaction is concluded, the system will freeze the buyer s deposit and the seller s commodity ownership. Members are prohibited from trading with itself, as well as pre-matching and trading with its related companies. 14

15 Additional Trading Board Electronic Tender Delivering Cargo A Bonded Zone Cargo B Delivering Cargo C On-Port Cargo D/E/F Settle in USD Settle in USD Settle in CNY Settle in CNY Truly reflects the parties buying and selling intention Publicly announce the name of tenderee in order to assist other members with identifying the counterparty and deciding whether to respond The tenderee selects Qingdao port as base, and specify the price difference for other ports, which helps tenderers to determine their costs. Enables the tenderee to review the tenderer s sample contract to reduce the risk of unable to reaching an agreement after deal is concluded online. Allows the tenderee to set deadline, when the tender automatically terminates*. The tenderee can pre-select potential tenderers, which effectively increase the chance to conclude a deal. *Duration of electronic tender shall not be less than 2 hours, and the deadline shall not be later than 3:50pm of a trading day 15

16 Products Available for Trading Continue to Expand Fines (Typical Products) Fines (General Products) Lumps (Typical Products) Lumps (General Products) Pellets Concentrates 34 Variables When First Launched PB Fines, Newman Fines, Yandi Fines1, Yandi Fines2, Mac Fines, Robe River Fines, Rocket Fines, FMG Special Fines, FMG Super Special Fines, Vale65 Fines, Vale63.5 Fines, Vale62 Fines, Vale58 Fines 67%, 65% 63.5%, 62% 60%, 58%1 58%2, 56% 54%, 52% PB Lump, Mac Lump, Newman Lump, Robe River Lump 63% 62% 60% 58% 65% 63% 66% 64% Newly Added 14 Variables IOCJ Atlas Fines 63% 62.5% 61.5% 61% 60.5% 57% First time introducing emerging miners products as typical products Vale- LONS A total of 48 Variables Vale-PFCJ Concentrates, Vale-PFFT Concentrates, METINVEST65 Concentrates, METINVEST66 Concentrates 16

17 Advantages of Trading Platform Effectively Eliminate Information Asymmetry Traditional Trading Information asymmetry. Trading Platform Bids and asks are open and transparent. Information distributed via various channels and means, reflecting market movements timely and comprehensively. Enhance informed decision-making. 17

18 Advantages of Trading Platform Improve Trading Efficiency and Lower Trading Costs Traditional Trading Communication is time consuming. Hiding transaction costs are high and cash turnover period is long. Higher risk of operational errors. Trading Platform With the use of internet technology, breakthrough the limits of time and geography, and enables market participants all over the world to trade on one platform. Lower unnecessary costs and risks in traditional trading, with easy and convenient trading procedures. 18

19 Advantages of Trading Platform Enhancing Credit and Reducing Trading Risks Traditional Trading High credit risks. Market is loosely regulated, and lack of effective dispute resolution. Trading Platform Form a regulative environment with comprehensive trading rules and membership management rules. Protect both buyers and sellers rights with trading rules such as freezing performance deposits and cargo rights. Establish strict risk management system by setting base price as well as price volatility. Accomplish safe fund management by opening members selfmanaged deposit account 19

20 Order and Transaction Volumes Gradually Increase Statistics Bid and Ask Orders (No.) Bid and Ask Orders (million tons) Bid, 257 Ask, Ask Bid Up to31st December 2012, total 57 transactions of 7.00 million mt were made amounted to USD 865 million and CNY 132 million. 20

21 Number of Members Continue to Grow Membership Structure Since launched, the platform has attracted members from all over the world, covering all sectors in iron ore market Foreign Miners Foreign Steelmills Foreign Traders Domestic Steelmills Germany Iran Japan Singapore Australia Brazil Domestic Traders 21

22 目录 Exchanges are Effective Tools for Market- Oriented Commodity Pricing China Iron Ore Spot Trading Platform Off to a Smooth Start Prospects and Visions of China Iron Ore Spot Trading Platform

23 More Effective Market Participation Gradually improve membership structure, which currently comprises of miners, steelmills and traders. Build up an international trading platform by attracting more entities to participate, such as emerging miners in Russia, Ukraine, Iran and Turkey, and steelmills in important steelproducing countries. Expand iron ore trade channels, and service iron ore supply chain. Increase market efficiency and enhance resource allocation. Breakdown of Bid & Ask Member Types in 2012 (by order volume) 25% 11% 64% Steelmills Miners Traders 23

24 More Diversified Products 48 products available for trade Will include more emerging miners products, and satisfy diversified market demand with differential products Exhibits long tail effects by using the platform to fulfill specific needs and reducing transaction costs occurred in traditional trading Top 10 Bid & Ask Products of 2012 (million tons) Top 7 Traded Products of 2012 (millions tons) 62% Fines Vale65 Fines IOCJ 63.5% Fines FMG Special Fines 0 5 Order Volume Vale63.5 Fines PB Fines 62% Fines Vale65 Fines 58% Fines Vale LONS IOCJ Transaction Volume 24

25 More Convenient and Smooth Trading System Attend closely to user habits, make the system easier to use, and pursue best users experience Making the functions and procedures for bids and asks, enquiries, clients account management, fund management, as well as cargo management easier and smoother, with clear and neat interface 25

26 More Comprehensive Services Recruit third-party service members, such as ports, agents, laboratories, insurers and banks, and provide full services for both buyers and sellers. Work with third-party data service providers to build up one-stop and user-friendly information terminal. Publish the platform s trading benchmark. Make the full use of Influence of spot market on other related markets, and provide the market with more transparent and justice price reference. Set up offices in key areas in order to serve our members more timely and effectively. 26

27 Vision of China Iron Ore Trading Platform The Platform is aiming at fulfill the functions of resource allocation, reflecting supply-demand relationship of the iron ore market, promoting the formation of a fair, impartial, rationale and transparent iron ore pricing mechanism, reducing the probability of sharp fluctuations of the iron ore price caused by manipulation, and promoting a healthy, orderly and stable developing iron ore market. 27

28 谢谢 Thank you