Indian Commodity Exchange Limited  <br />Presentation : Iron Ore Derivatives<br />1<br />
What are Derivatives<br />Derivative is a financial instrument (or, more simply, an agreement <br />between two parties) t...
Why Commodity Derivatives…<br />Dynamic Price Discovery<br />Transparency – Information Dissemination<br />Hedging Tool<br...
Iron Ore Derivatives<br />4<br />
Iron Ore Derivatives<br />Anticipating the Needs of a Changing Market…<br /><ul><li>The iron ore and related ferrous marke...
The mining and transport of this raw material is capital intensive, which leads to supply constraints not readily filled b...
These factors thus expose the steel mills not only to supply constraints, but also to transport uncertainties, which can l...
Demand is expected to rise with the continual growth of emerging markets.
China produces nearly one-half of the world’s finished steel, making it the premier destination for seaborne iron ore ship...
What Impacts Iron Ore Prices?<br />Steel-making Demand for Iron Ore<br />Quality and Grade Specifications<br />Available S...
World Steel Scenario<br />Global Crude Steel Production (Mt)<br />7<br />
World Iron Ore Scenario<br /><ul><li>The three largest iron ore companies Vale (Brazil), Rio Tinto (UK), BHP Billiton (Aus...
Output increased mainly in four major producing countries- Brazil, Australia, China & India.
China’s Iron Ore import was 628 million tons – 70% of seaborne trade.</li></ul>8<br />
World Iron Ore Scenario….contd<br />It is anticipated that around 685-million tons of new production capacity may come on ...
Global: Production, Consumption & Trade<br />10<br />
Top 5 Iron Ore Producing Countries <br />1. China   2. Brazil   3. Australia   4. India   5. South Africa<br />Top 5 Iron ...
Iron Ore : Indian Scenario<br /><ul><li>Reserves: 25 Billion Tons (6% of Global), ranked 5th - High quality reserves
4th largest producing country–218 Mt (FY 2009-10)
3rd Largest exporting country–117 Mt (FY 2009-10)</li></ul>12<br />
Major & Intermediate ports for Iron Ore Exports<br />13<br />
Iron Ore : Indian Scenario<br />14<br />
Direction Of Trade<br />15<br />
Volatility & Changing Pricing Landscape<br /><ul><li>Stable and longer price cycles are history.
After decades, annual benchmark pricing is dismantled.
Quarterly; Monthly; Spot; Index- A new era has started.
Prices have moved from US$ 17 to US$ 170 in 7 years: Higher returns = Greater risks
Price risk management no longer optional.</li></ul>16<br />
Volatility & Changing Pricing Landscape..<br />17<br />
…. Iron Ore is moving in the direction of setting prices as Copper, Nickel or other base metals are on a completely transp...
Daily Price Volatility (IO-TSI62%Fe)<br />19<br />
  Example - Hedging<br />It is January 2011 and the price for iron ore CFR China 62% Fe fines currently<br />stands at $ 1...
  Example - Hedging<br />Buyer:			Steel mill<br />Seller: 			Iron ore trader<br />Product:			Iron Ore CFR China 62% Fe Fin...
 Hedge Result<br />Buyer Steel Miller<br />Physical<br />Ease in cost = $2,62,000<br />[(174.6-169.36)*500*100]<br />Futur...
 Benefits of Hedging<br /><ul><li>Hedging is the process of offsetting risk (by locking effective price), owing to adverse...
Any gain or loss in the spot market offset (partially if not fully)with the loss or gain respectively in the derivatives m...
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IRON ORE

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  1. 1. Indian Commodity Exchange Limited <br />Presentation : Iron Ore Derivatives<br />1<br />
  2. 2. What are Derivatives<br />Derivative is a financial instrument (or, more simply, an agreement <br />between two parties) that has a value, based on the expected future price<br />movements of the asset to which it is linked—called the underlying asset<br />— as a share or a currency or a commodity <br />Most common derivatives are swaps, futures, and options<br />Derivatives are usually broadly categorized by:<br />the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); <br />the relationship between the underlying asset and the derivative (e.g., forward, option, swap); <br />the market in which they trade (e.g., exchange-traded or over-the-counter); <br />their pay-off profile. <br />2<br />
  3. 3. Why Commodity Derivatives…<br />Dynamic Price Discovery<br />Transparency – Information Dissemination<br />Hedging Tool<br />Even smaller players reap same advantage as big ones<br />Takes care of counter party default<br />Easy to sell / buy in liquid market<br />Leverage<br />3<br />
  4. 4. Iron Ore Derivatives<br />4<br />
  5. 5. Iron Ore Derivatives<br />Anticipating the Needs of a Changing Market…<br /><ul><li>The iron ore and related ferrous market is the second largest commodity market by volume after crude oil.
  6. 6. The mining and transport of this raw material is capital intensive, which leads to supply constraints not readily filled by other materials.
  7. 7. These factors thus expose the steel mills not only to supply constraints, but also to transport uncertainties, which can lead to volatile price fluctuations.
  8. 8. Demand is expected to rise with the continual growth of emerging markets.
  9. 9. China produces nearly one-half of the world’s finished steel, making it the premier destination for seaborne iron ore shipments.</li></ul>5<br />
  10. 10. What Impacts Iron Ore Prices?<br />Steel-making Demand for Iron Ore<br />Quality and Grade Specifications<br />Available Supply<br />Seaborne Freight <br />6<br />
  11. 11. World Steel Scenario<br />Global Crude Steel Production (Mt)<br />7<br />
  12. 12. World Iron Ore Scenario<br /><ul><li>The three largest iron ore companies Vale (Brazil), Rio Tinto (UK), BHP Billiton (Australia), together control 35% of total iron ore production and 61% of total seaborne Iron ore trade.
  13. 13. Output increased mainly in four major producing countries- Brazil, Australia, China & India.
  14. 14. China’s Iron Ore import was 628 million tons – 70% of seaborne trade.</li></ul>8<br />
  15. 15. World Iron Ore Scenario….contd<br />It is anticipated that around 685-million tons of new production capacity may come on stream between 2010 and 2012.<br />It is predicted that the world iron-ore market would be characterized by tight conditions over the short term, but that supply would gradually catch up with demand and that prices would decline from current levels, although they would stay higher than in the period before 2008.<br />9<br />
  16. 16. Global: Production, Consumption & Trade<br />10<br />
  17. 17. Top 5 Iron Ore Producing Countries <br />1. China 2. Brazil 3. Australia 4. India 5. South Africa<br />Top 5 Iron Ore Consuming Countries <br />1. China 2. Japan 3. India 4. Russia 5. USA<br />Top 5 Iron Ore Exporting Countries <br />1. Australia 2. Brazil 3. India 4. South Africa 5. Canada<br />Top 5 Iron Ore Importing Countries <br />1. China 2. Japan 3. South Korea 4. Germany 5. Taiwan <br />Iron Ore : World Scenario<br />11<br />
  18. 18. Iron Ore : Indian Scenario<br /><ul><li>Reserves: 25 Billion Tons (6% of Global), ranked 5th - High quality reserves
  19. 19. 4th largest producing country–218 Mt (FY 2009-10)
  20. 20. 3rd Largest exporting country–117 Mt (FY 2009-10)</li></ul>12<br />
  21. 21. Major & Intermediate ports for Iron Ore Exports<br />13<br />
  22. 22. Iron Ore : Indian Scenario<br />14<br />
  23. 23. Direction Of Trade<br />15<br />
  24. 24. Volatility & Changing Pricing Landscape<br /><ul><li>Stable and longer price cycles are history.
  25. 25. After decades, annual benchmark pricing is dismantled.
  26. 26. Quarterly; Monthly; Spot; Index- A new era has started.
  27. 27. Prices have moved from US$ 17 to US$ 170 in 7 years: Higher returns = Greater risks
  28. 28. Price risk management no longer optional.</li></ul>16<br />
  29. 29. Volatility & Changing Pricing Landscape..<br />17<br />
  30. 30. …. Iron Ore is moving in the direction of setting prices as Copper, Nickel or other base metals are on a completely transparent Exchange under the full control against any type of manipulations ….<br />Source: Iron Ore Market 2009-2011 (UNCTAD)<br />18<br />
  31. 31. Daily Price Volatility (IO-TSI62%Fe)<br />19<br />
  32. 32. Example - Hedging<br />It is January 2011 and the price for iron ore CFR China 62% Fe fines currently<br />stands at $ 174.60/dmt.<br />Buyer (Steel mill)<br />A steel mill in China expects to import iron ore 62% Fe fines of a Cape size<br />shipload of 75,000 metric tons (mt) in March 2011 and wishes to fix this cost as<br />they have just clinched a major deal to supply flat steel products in 2011.<br />To hedge this position, this steel mill will bid at $169.00/dmt for March 2011<br />Iron Ore Swap on CFR China 62% Fe Fines.<br />Seller (Iron ore trader)<br />At the same time, an iron ore trader with an inventory of iron ore wishes to<br />hedge against a possible decline in stock value from drop in iron ore rates. The<br />trader would like to lock-in the iron ore price of $169.00/dmt.<br />20<br />
  33. 33. Example - Hedging<br />Buyer: Steel mill<br />Seller: Iron ore trader<br />Product: Iron Ore CFR China 62% Fe Fines<br />Quantity: 75,000mt (750 lots)<br />Contract Price: $169.00/dmt<br />Settlement Date: 31st March 2011<br />Settlement Basis: Average of the spot price assessments of the contract month<br />Due to natural calamity in Japan, the price of iron ore CFR China 62% Fe <br />fines falls from $174.60/dmt to $169.36/dmt in March 2011. As a result, <br />the steel mill doesn’t suffer an increase in input cost.<br />21<br />
  34. 34. Hedge Result<br />Buyer Steel Miller<br />Physical<br />Ease in cost = $2,62,000<br />[(174.6-169.36)*500*100]<br />Futures<br />Payoffs = $ 18,000<br />[(169.36-169.00)*500*100]<br />Net<br />P/L = $ 2,80,000<br />[262000+18000]<br />Seller – Iron Ore Trader<br />Physical<br />Rise in Value = $2,25,000<br />[(109-106)*500*100]<br />Futures<br />Payoffs = -$2,62,000<br />[(105.5-109)*500*100]<br />Net<br />P/L = -$ 37,500<br />[225000-262000]<br />22<br />
  35. 35. Benefits of Hedging<br /><ul><li>Hedging is the process of offsetting risk (by locking effective price), owing to adverse price movements, by taking opposite position in the derivatives market against the position in the spot market.
  36. 36. Any gain or loss in the spot market offset (partially if not fully)with the loss or gain respectively in the derivatives market.
  37. 37. For a stable and manageable balance sheet of a company, hedging in indispensible. </li></ul>23<br />
  38. 38. Iron ore impacting steel margin<br />24<br />
  39. 39. Iron ore impacting steel margin<br /><ul><li>Volatile Iron Ore prices are impacting steel mills ability to secure stable prices –eventually it will off load on the consumer (you and I)
  40. 40. Steel buyers can access the iron Ore swaps market to hedge (with basis risk) a portion of their price risk
  41. 41. … this is similar to airlines hedging jet fuel exposure using crude oil contracts
  42. 42. … or steel contracts which meets the needs of buyers in different parts of the world
  43. 43. There are several steel contracts available at Exchanges (LME, DGCX etc). Volumes are increasing.</li></ul>25<br />
  44. 44. Iron ore and steel 3-4 years from now<br />Iron Ore Miners<br />Steel Mills<br />Steel Users<br />Spot Iron Ore<br />Spot Steel<br />Locked in Price (Margin)<br />Locked in Price (Margin)<br />Locked in Margin<br />Iron Ore Swaps and others<br />Buyers and sellers of Iron Ore use Iron Ore swaps and FFAs (Freight swaps) to lock in forward prices, effectively hedging against adverse movements in the price of Iron Ore and ocean freight. This achieves predictable pricing and allows P+L planning in a spot trading environment.<br />Iron ore & Steel Swaps and Futures<br />Buyers and sellers of Steel products use Iron Ore swaps and different steel swaps and steel futures contracts to lock in the forward price of Steel, which will fluctuate according to the cost of delivered Iron Ore (Ore/Freight combination) supply/demand pressure of steel and the marginal operating environment of steel mills.<br />26<br />
  45. 45. INDIAN <br />World’s 1st Exchange to launch an Iron Ore Future Contract…<br />27<br />
  46. 46. About ICEX<br />Recognition granted by Govt. of India on 9th October 2009<br />Operations Commenced on 27th November 2009<br />Currently Trading in 11 Commodities<br />Over 450 memberships with more than 1000 TWS spread across India<br />28<br />
  47. 47. Key Stakeholders<br />29<br />
  48. 48. Key Stakeholders<br />Reliance Exchange Next Ltd - A wholly owned subsidiary of Reliance Capital, represents Reliance entry into Exchange vertical. R Next aims to be present across asset classes in the Exchange space<br />MMTC Ltd - Leading exporter of Minerals, largest buyer of Fertilizers, <br />biggest importer of Bullion & Non- Ferrous Metals in India and <br />active player in agro-products<br />Indiabulls- Top ranked business houses in India with business interests in<br />Real Estate, Infrastructure, Financial Services, Retail, Multiplex<br />and Power<br />KRIBHCO -World’s premier fertilizer producing Cooperative Society<br />IDFC- Specialized financial intermediary for infrastructure development<br />IPL - Biggest canalizing agency for import of Urea and other fertilizers on<br />behalf of GOI<br />30<br />
  49. 49. Indian Commodity Exchange Iron Ore Future Contracts<br />31<br />
  50. 50. Indian Commodity Exchange Iron Ore Future Contracts<br />32<br />
  51. 51. Our Associations – Our Strengths<br />33<br />
  52. 52. Factors Effecting Prices<br /><ul><li>Grade of Iron Ore
  53. 53. Export Demand for Iron Ore
  54. 54. Steel industry growth
  55. 55. Sea Freight rates
  56. 56. Govt. Regulations (EXIM and Mining)
  57. 57. Big Players (Big – Trio) Decision in Pricing Mechanism
  58. 58. Growth of BRICI</li></ul>34<br />
  59. 59. Benefits of Future Trading in Iron Ore<br /><ul><li>Measure of hedging the price volatility of Iron ore as prices are very volatile
  60. 60. Price stabilization-in times of violent price fluctuation
  61. 61. Easy to own/sell iron-ore
  62. 62. Standardized contracts guarantee the quality and quantity of iron.
  63. 63. The exchange guarantees performance of the contract irrespective of buyer and/or seller
  64. 64. The Exchange has set up a SGF-Settlement guaranteed
  65. 65. Daily MTM Settlement</li></ul>35<br />
  66. 66. Thank You<br />For more information, please visit our website at www.icexindia.com<br />

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