1. /1 TSI is a specialist pricing service focussed on the ferrous market only. Our prices are produced using spot market transaction data: a rigorous 21st century approach. The indexes TSI produces are:
-Independent & Neutral
-Transparent & Verifiable
-Free From Subjectivity We sample the whole supply chain to ensure a representative buy/sell balance of data providers is contained in every volume-weighted price we produce. New owner, same mandate. Operating since 2006, our owner (SBB Group) was acquired by Platts in 2011. Nevertheless, TSI continues to operate as a operationally separate, independent entity within Platts.
Background to The Steel Index (TSI)
Sector-specific reference prices for a volatile market.
For physical markets (index-linking) For derivative markets (hedging)
FOB Australia
CFR China
29/9/14
TSI Premium Metallurgical Coal Indices
2. Iron Ore
Coking Coal
Scrap
Steel
An international pricing service, dedicated solely to ferrous markets. Founded in 2006, spearheading frequent pricing in the sector.
Pioneer of data-driven approaches to index production. We use actual physical spot market transactions to produce indices.
A confidential service: Non-Disclosure Agreements signed with index participants, enabling price data to be reported, with no fear of disclosure to the wider market.
Proponents of a methodology designed to maximise participation, minimise opportunities for manipulation and remove subjectivity from the process.
Acquired in 2011, TSI continues to operate as an operationally distinct group within Platts.
What is The Steel Index (TSI)?
3. TSI 62% Fe Iron Ore, CFR Tianjin.
TSI Turkish 80:20 Ferrous Scrap, CFR Iskenderun
TSI North European HRC, ASEAN HRC
TSI FOB Australia, CFR China
Buyers and sellers use our indices to negotiate spot sales and in supply agreements.
TSI’s prices are widely used by exchanges as the settlement for swaps, options and futures contracts used in price-risk management across the ferrous complex.
Users of TSI prices
4. Over 550 data providers deliver their actual
transaction data to TSI on a confidential basis.
Our methodology involves non-standard
products being normalised to common TSI
index specifications.
Quality adjustments are given a quantifiable
value, which is applied to the Delta between
product specifications and the relevant TSI
index specification.
TSI 62%
MNP
SSFG
PB
fines
TSI JM25 Premium Coking Coal
Hail
Creek
German
Creek
Peak
Downs
TSI price production process
5. - Metallurgical coal, a brief history.
- Market Update
- The indices
- Correlations
- Changes to Paper Markets
6. -100%
-50%
0%
50%
100%
150%
200%
$0
$50
$100
$150
$200
$250
$300
$350
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% Change year-on-year (RHS)
Hard Coking coal price US$/tonne, FOB Australia (LHS)
Coking Coal
-20%
0%
20%
40%
60%
80%
$0
$50
$100
$150
$200
$250
$300
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% Change y-on-y
Iron Ore US$/t FOB Brazil
Iron ore
Death-knell sounds for ‘benchmark’
Volatility in the market after decades of sluggishness encouraged the abandonment of annual pricing for both iron ore and coking coal.
Source: SBB/TSI
7. 0
50
100
150
200
250
300
350
2004
2005
2006
2007
2008
2009
2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Hard Coking Coal contract prices
Annual prices gave way to quarterly prices in 2011... Almost 4 full years of quarterly prices followed. Now, supply is split between those offered term (quarterly), and not.
‘Quarterly’ divides suppliers…
BHP exits quarterly
and monthly term pricing.
Source: SBB/TSI
8. -45
-25
-5
15
35
55
75
95
100
110
120
130
140
150
160
170
180
Contract Prices
Spot Minus Quarterly(RHS)
TSI Spot Premium HCC prices
‘Term’ buyers rue a cost disadvantage to ‘spot’ buyers. Quarterly buyers pay an average premium of S$17.5/t over spot, per month over this period. But…buyers can get closer exposure to spot pricing and lock supply by indexing monthly deals.
US$/t
US$/t
…Quarterly divides buyers too
Source: TSI
9. /9
Changes to Physical Sales Terms
Monthly
Quarterly
Spot
Term
Indexed
Indexed
FOB
CFR
A confusing mosaic of concurrent selling options became prevalent for some time. This optionality/complexity is typical of markets in transition; as is rationalisation. TSI anticipates optionality to be rationalised to two offers:
1)Index-linked, or spot.
2)FOB loading or CFR China discharge
Indexed
Spot
FOB
CFR
10. /10
Changes to Risk Management
New options in risk management. SGX launches two contracts in August 2014.
FOB Australia
FOB Australia
FOB Australia
FOB Australia
CFR China
Launch 2011
Launch 2011
Launch Aug ‘14
Launch Aug ‘14
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2011
2012
2013
2014 to Sept
CME
SGX
tonnes
Source: TSI/SGX/CME
11. - Metallurgical coal, a brief history.
- Market Update
- The indices
- Correlations
- Changes to Paper Markets
12. /12
Prices Depressed, market evolving
Whilst prices are off their lows, they have not seen any meaningful bounce.
Despite moribund price action, the market has been far from boring over 2014.
What has quietly emerged (or been cemented) is the existence of two separate world coking coal markets, each characterised by fundamentally different structures, dynamics and prices: FOB & CFR.
Both see vibrant spot market activity and whilst there is (trader-driven) interplay, there is separation too.
13. /13
CFR still the most liquid single buyer
Source: TSI
CFR spot transactions distinguish China as the largest single country sourcing spot.
In context, it takes the rest of the world’s spot buying as a bloc to achieve near parity with China’s individual spot demand.
Over US$700 million of CFR spot trades have been reported to TSI so far in 2014 and
data provider numbers are growing strongly.
100
120
140
2-Jan-14
2-Feb-14
2-Mar-14
2-Apr-14
2-May-14
2-Jun-14
2-Jul-14
2-Aug-14
2-Sep-14
FOB spot transactions have increased substantially over the course of 2014.
Over US$535 million of FOB spot trades have been reported to TSI so far in 2014.
Normalised FOB transaction
Normalised FOB bid/offer
TSI Premium, FOB
FOB Index 2014
14. Recorded Premium Coal transactions
FOB Sales*
CFR Sales*
Number of FOB transactions reported to TSI outweigh CFR transactions…just.
Absolute numbers of spot premium coal sales are fairly balanced between FOB & CFR (though many FOB buys are surely headed to China)…
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
FOB
CFR
•Double counting excluded (i.e. when both sides of trades recorded).
2014 YTD Transactions
15. CFR Loading Volumes
FOB Loading Volumes
Mean Load: 56,000t
Mean Load 80,000t
…But premium CFR transactions outmuscle FOB ones in terms of volume. The average CFR shipment is substantially larger than FOB, with the latter often taking part- shipments or even hold shipments. That being said, the trend over 2014 in FOB sales has been towards larger shipments, with the number of smaller sales reducing each quarter.
Size of recorded transactions
16. /16
CFR Market changing, again
Source: TSI
Reduced costs at Chinese mills have made importers there increasingly discriminating (on price). The gap between mid-vol and low vol (under 21) has yawned wide over 2014.
Volatile Matter
17
19
21
23
25
27
67
68
69
70
71
72
73
74
Coal Brand Characteristics
Goonyella
Oaky Creek
Peak Downs
Illawarra
Saraji
Elkview
German Creek
TSI JM25
Standard
Premium
Blue Creek
Wollombi
Goonyella C
N. Goonyella
Oaky Creek
Hail Creek
Peak Downs North
Coke Strength After Reaction (CSR)
Brand
Blend
TSI JM25 Premium Hard Coking Coal Index Specification
Mid-Vol
Low-Vol
Index- permissible range
17. CFR H1 2014
Brands
Blends
CFR H2 TD 2014
Brands
Blends
CFR 2013
Brands
Blends
CFR blend sales rising importance
Increasing buyer price-sensitivity and supplier competition with Chinese-produced metallurgical coal has encouraged blended ‘brand’ product volumes to grow in CFR markets, as well as in FOB ones.
Source:: TSI
18. -14
-12
-10
-8
-6
-4
-2
0
Australia
USA
BMA
Glencore
Peabody
Anglo
Vale
Arch
Alpha
Cliffs
Consol
Walter
Supply reduction biting (for now)
Cost reductions near their end : cost curve has flattened after 5 rounds of cuts. Australian supply reductions make the news, but 2/3rds of production profitable. For each tonne removed, a greater quantity is slated to replace it in the next two years.
Supply Reductions 2012-2014
Source: TSI
19. Source: CEIC
Chinese supply stickiness…
…A downside surprise to seaborne suppliers. The “China price” is the envy of other importers around the world, who find themselves unable to replicate it. Price achieved due to widely available alternative domestic supply.
Not only is that supply sticky, blending is continuously improving to create better coke. Whilst around 20% of Chinese battery capacity is underutilised, scrapped coke export taxes in Dec ‘12 saw exports rise from 1mt, to 4.6mt in 2013 and an anticipated 7mt in 2014. Ovens broadly sited inland, so rising coke exports no boon to seaborne suppliers.
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
Chinese Coke Exports
tonnes
20. ...but substitutes push back
Imports press in...
Seaborne Supply
Port & Mill stocks
Overland Imports
Domestic Supply
What defines the CFR market?
Seaborne supply faces major headwinds to penetrating the Chinese market; 2 of which are largely absent from FOB buyer’s markets. Discriminatory pricing does not exist for FOB buyers: rather, CFR China importers have significant alternatives in the form of deeper inventory, domestic supply and neighbouring sources of alternatives that FOB buyers simply do not possess.
Chinese Demand
21. Globally, miners incentivised to spread costs over more tons (max. production).
Domestic suppliers 'all in ', no retreat possible: overseas ones have overcapacity & take or pay discourages withdrawal.
SUPPLIERS: WEAK
SUBSTITUTES: HIGH
NEW ENTRANT RISK: LOW
CUSTOMERS: STRONG
Plentiful substitutes allow price-sensitive procurement stance.
No impatience to consume: few ill effects to delaying purchasing over last 2 years.
New supply already allocated/in commissioning a disincentive to further additions, along with current pricing.
Demand ex-China not sufficient to absorb available tons post- expansion creep. Mid-vol market oversupplied. Competitors abound.
Primarily supply substitutability (i.e. not FINEX/Scope 21):
Domestic, US, Canadian, Indonesian, Mongolian, African.
Efficiency (PCI, pet coke, blending)
COMPETITIVE RIVALRY: HIGH
CFR market structure globally unique
China is a ‘one-off’ world market, fully deserving a dedicated index to track price movements.
22. - Metallurgical coal, a brief history.
- Market Update
- The indices
- Correlations
- Changes to Paper Markets
23. FOB
CFR
FOB & CFR Markets
Single-Origin Coals (Australia) International Supply Competition Price set by bid competition
Multiple-Origin Coals
(Africa I USA I Canada I Australia I Indonesia)
International supply competition
Price set by import vs substitute prices
TSI produce 2 premium coking coal indices to account for different markets:
•FOB Australia (Premium Hard Coking Coal): historically over 50% of global supply
•CFR China (JM25 Premium Hard Coking Coal): historically over 50% of spot liquidity
CFR still by far the most liquid single destination seaborne coal buyer
24. FOB permissible brands
Saraji
German Creek
Peak Downs
Hail Creek
Goonyella
Illawarra
Moranbah North
North Goonyella
Oaky Creek
Oaky North
Peak Downs North
Wollombi
Goonyella “C”
Riverside
FOB
Pricing Point: FOB East Coast, Australia
•Minimum Lot Size: 20,000 metric tonnes
•Particle Size: Particle size below 55mm for at least 90% of the cargo
•Transport: Bulk Shipment
•Timing: Loading within 60 days of transaction
•Payment: At Sight
•Currency/Units: US$ per metric tonne
Diverse coal brands from a number of producers characterise Australian premium hard coking coal supply.
25. CFR permissible brands
Saraji
German Creek
Peak Downs
Blue Creek
Elkview
Goonyella
Illawarra
Moranbah North
North
Goonyella
Oaky Creek
Oaky North
Peak Downs North
Premium
Standard
Wollombi
Goonyella “C”
Hail Creek
Pricing Point: CFR Jingtang Port, China
•Minimum Lot Size: 20,000 metric tonnes
•Particle Size: Particle size below 55mm for at least 90% of the cargo
•Transport: Bulk Shipment
•Timing: Loading within 60 days of transaction
•Payment: At Sight
•Currency/Units: US$ per metric tonne
CFR
Chipanga
The CFR market is characterised by drawing from an even wider pool of globally supplied premium hard coking coals and suppliers.
26. - Metallurgical coal, a brief history.
- Market Update
- The indices
- Correlations
- Changes to Paper Markets
27. 500
510
520
530
540
550
560
570
580
70
80
90
100
110
120
130
140
150
02/01/2014
02/03/2014
02/05/2014
02/07/2014
02/09/2014
CFR China 62% Ore
CFR China JM25 Coking Coal
ASEAN HRC (RHS)
Good luck! All prices are dancing to the beat of separate drummers, highlighting the need for independent paper contacts to deal with price risk in each commodity. Correlations are fleeting.
Spot the correlation
US$/t
US$/t
R2 correlations
Daily Jan 14-Sep 14
Monthly Jan ‘13-Sep ‘14
Coking Coal - Ore
62.7%
84.1%
Iron Ore - ASEAN HRC
80.6%
59.9%
Source: TSI
28. SGX offers both FOB & CFR coking coal swaps and futures in 500 tonne lots, basis TSI. CME offers futures in 1,000 ton lots, basis Platts.
Active contracts
29. 105
115
125
135
145
155
165
175
TSI
Platts
With active FOB contracts available on CME & SGX, it is appropriate to compare index movements….
Active contract comparison (FOB)
Quick FOB Facts (Monthly)
TSI/Platts FOB Correlation (R2)
99.3%
Period
21 months
Frequency
Monthly
US$/t
Source: TSI/Platts
30. Quick FOB Facts (Daily)
TSI/Platts FOB Correlation (R2)
98.4%
Period
427 Days
Frequency
Daily
100
110
120
130
140
150
160
170
180
TSI
Platts
...Variation basis due to Platts FOB being a CFR netback and TSI FOB only accounting for FOB sales. Daily freight rate movements do not affect the TSI index – only FOB sales.
US$/t
Active contract comparison (FOB)
Source: TSI/Platts
31. Price History: CFR (monthly)
TSI’s CFR China index is constructed solely through metallurgical coal trade conducted on a delivered-China basis. No strength, or weakness from FOB sales, bids or offers are is netted forwards into this index.
115
125
135
145
155
165
175
185
195
US$/t
Source: TSI
32. Price History: CFR (daily)
115
125
135
145
155
165
175
185
195
14 Jan 13
29 Jan 13
14 Feb 13
1 Mar 13
18 Mar 13
3 Apr 13
18 Apr 13
6 May 13
21 May 13
6 Jun 13
21 Jun 13
8 Jul 13
23 Jul 13
7 Aug 13
26 Aug 13
10 Sep 13
25 Sep 13
10 Oct 13
28 Oct 13
12 Nov 13
27 Nov 13
13 Dec 13
31 Dec 13
16 Jan 14
3 Feb 14
18 Feb 14
5 Mar 14
20 Mar 14
4 Apr 14
22 Apr 14
8 May 14
26 May 14
10 Jun 14
25 Jun 14
10 Jul 14
25 Jul 14
12 Aug 14
27 Aug 14
12 Sep 14
JM25 Premium, CFR China
US$/t
Source: TSI
33. - Metallurgical coal, a brief history.
- Market Update
- The indices
- Correlations
- Relativities & Co-efficients
34. Co-efficient design
Metallurgical coal products have the widest number of interdependent variables – a
unique normalisation challenge in ferrous markets.
Ash
.836
CSR
VM
Fluidity
.817
FSI
.599
RV Max
.765
FSI
.536
Ash
.586
RV Max
.574
Vitrinite
.534
Widely interdependent
Variables
Sulphur
FSI
.871
RV Max
.673
Ash
.611
Vitrinite
.859
Vitrinite
VM
.817
RV Max
.564
T.Dil
.487
Fluidity
Sulphur
.859
FSI
.862
Ash
.692
Sulphur
.871
Vitrinite
.862
FSI
Ash
CSR
.836
Vitrinite
.692
RV Max
.745
FSI
.783
Sulphur
.611
VM
.586
RV Max
FSI
.809
Fluidity
.564
Vitrinite
.520
Ash
.783
VM
.765
Sulphur
.673
CSR
.574
RV Max
.809
Ash
.745
CSR
.599
VM
.536
Most widely interdependent Variables
Stronger
Correlate
35. -3
-2
-1
0
1
2
3
Vitrinite
CSR
Fluidity
Ash
Phosphurus
Volatile Matter
TSI Spec
Coking Coal A
Coking Coal B
Coking Coal C
Coking Coal D
Normalisation in practise
Each coal brand has different physical and chemical characteristics. TSI’s specification is the base from which we judge all coking coals.
36. TSI Index Methodology
CSR
Volatile Matter
Vitrinite
Fluidity
Ash
TSI Spec
71
21
68
600
10
Coking Coal A
69
18
59
800
10
Coking Coal B
67
19
63
1100
10.5
Coking Coal C
72
24
72
510
11
CSR
Volatile Matter
Vitrinite
Fluidity
Ash
TSI Spec
71
21
68
600
10
Coking Coal A
+2
+3
+9
-200
0
Coking Coal B
+4
+2
+5
-500
-0.5
Coking Coal C
-1
-3
-4
+90
-1
TSI logs the differential between each coking coal product and the TSI specification…
37. Normalisation Coefficients
Premium Δ %
-0.955%
-0.775%
>23.5 -0.500%
<20 -1.185%
TM From Standard
Rvmax 0.500%
Fluidity 1.300%
FSI 0.600%
CSR 0.850%
Total Dilatation 0.010%
Vitrinite 0.080%
Ash
VM
Price Quality Adjustment
Base FOB price per 1 unit
change
-0.900%
-0.775%
>23.5 -0.500%
<20 -1.385%
From Standard
0.150%
Y-index 0.050%
CSR 0.500%
Price Quality Adjustment
Base CFR price per 1 unit
change Premium Δ %
Ash
TM
G-index
VM (20-23.5)
Quality adjustments are made with the following normalisation
coefficients to equalise products so that we can compare ‘like with like’.
FOB CFR
Different valuations due to different coals making up FOB/CFR inputs…
…As well as different normalisation values applied to each series.
38. Relativities: FOB
TSI uses a ‘mechanistic’ model for normalisation.
The below does not ‘value’ the coals, it delivers a mathematically
derived assumption for the value of each, based on index @ US$114.
Brand Normalisation Prediction Spread to Index
Peak Downs $115.1 101.0
Saraji $114.8 100.7
North Goonyella $114.2 100.2
TSI Index Premium FOB $114.0 100.0
German Creek $113.9 99.9
Wollombi $113.7 99.7
Illawara $113.7 99.7
Oaky North $113.6 99.6
Moranbah North $113.5 99.6
Goonyella $112.5 98.7
Oaky Creek $112.2 98.4
Hail Creek $112.1 98.3
Peak Downs North $108.9 95.5
%
39. Relativities: CFR
Brand Normalisation Prediction Spread to Index
Peak Downs $125.02 102.2
Saraji $124.32 101.7
Elkview $123.01 100.6
German Creek $122.87 100.5
Illawara $122.78 100.4
TSI Index Premium CFR $122.30 100.0
Hail Creek $121.44 99.3
wollombi $121.11 99.0
Riverside $121.00 98.9
Goonyella B $120.44 98.5
North Goonyella $120.14 98.2
Goonyella $119.95 98.1
Oaky $119.85 98.0
Standard $119.79 98.0
Premium $118.72 97.1
Peak Downs North $117.97 96.5
TSI uses a mechanistic model for normalisation.
The below does not ‘value’ the coals, it delivers a mathematically
derived assumption for the value of each, based on index @ US$122.
%
40. Steel: since 2006 Iron Ore: since 2008 Scrap: since 2010 Coking Coal: since 2012
Thank you for your attention!
mcoal@thesteelindex.com
41. Trading is voice brokered, with a number of brokerages now offering services in metallurgical coal. The following contacts and brokerage contacts are all based in Singapore:
Singapore
Role
Tim Hard
Index provider representative
www.thesteelindex.com
Adrian Lunt
Exchange representative
www.sgx.com
Jarek Mlodziejewski
Broker
www.freightinvestorservices.com
Stephanie Idicula
Broker
www.ssyonline.com
Olivia Cailao
Broker
www.gfigroup.com
Kenny Mah
Broker
www.straitsfinancial.com
Tom Blackwell
Broker
www.icap.com
Alex Williams
Broker
www.marexspectron.com
Joelle Zhang
Broker
www.clarksons.com
Index/Exchange/Broker Contacts
42. TSI coking coal contacts
Contact our local staff for further information on TSI’s coking coal indices, or data for back-testing correlations .
N. America
•Kurt Fowler: +1 412 431 0584 mcoal@thesteelindex.com
Europe
•Phil Whittaker +44 207 176 7667 mcoal@thesteelindex.com
Asia
•Tim Hard
•Serena Seng
•Jing Ng +65 6216 1057 mcoal@thesteelindex.com
