Shanghai Scrap

[for iron ore and steel geeks only!]

Since I’m taking a brief book writing break to post about UFOs, I’ll also take the liberty of posting a little something about iron ore markets, too. Specifically, an important piece of China business news that seems to have eluded the region’s reporters. Namely: Metal Bulletin has launched the world’s first iron ore pricing index – and it is indexed for delivery to Qingdao.

I don’t have the time or inclination to go into all of the details of why this is important (for those interested in analysis, you can find a few of my previous posts on the subject, with additional links, here and here). For now, suffice it to say that – for decades – a very large percentage of the world’s iron ore has been sold on an annual, renewable “benchmark” contract between the world’s three largest iron ore companies, and the companies with whom they choose to negotiate. If you weren’t big enough, or not worthy enough, you were left to buy ore on the much more expensive “spot” market.

But something dramatic happened over the last two years: iron ore prices skyrocketed with world steel demand (largely driven by China’s world-beating steel production), and the big ore companies soon found that they were being paid far, far less for “benchmark” ore than what others received on the “spot” market. As a result, the ore companies began to rally for an open, transparent market with fluctuating prices … and the Chinese (represented by Bao Steel) began to sing the praises of a “benchmark” pricing system that guaranteed price stability for Chinese steel mills.

No surprise, the suppliers – and not the buyers – will dictate how iron ore pricing turns out. And Metal Bulletin’s iron ore index is the first step toward the transparent pricing that the ore companies claim to have wanted – before the bottom fell out of the world economy, steel demand, and ore prices. No surprise, it is indexed to Qingdao, where much of the world’s iron ore is delivered. Indeed, an iron ore index that didn’t fix its delivery point to China wouldn’t be of much use to anyone. Problem is, the high prices that justified such an index in the first place, have totally collapsed over the last two months, and Metal Bulletin has noticed:last week’s index prices were delivered to email inboxes with this expert commentary:

The MB Iron Ore Index fell to $87.12/tonne … on 10th October 2008, having been over $180/tonne as recently as July. The significant decline has been a function of many factors, including the Beijing Olympics, a slowdown of growth in fundamental Chinese steel demand, large iron ore stocks at Chinese ports, and a sharp decline in global freight rates. Trading volumes have also fallen, with a number of buyers staying out of the market as they wait to see at what point price stablize before returning.

I haven’t seen much blog commentary on how the world economic downturn is going to effect the Chinese economy, so I throw the MB index and commentary out there for discussion. Briefly, in my opinion, the effect will be dramatic, and possibly debilitating in regions dependent upon heavy industry. And now, back to my book.

[Addendum: Apparently, MB is offering a free email trial for anyone interested in receiving the iron ore index prices on a weekly basis. Sign up here. And for the record: I have no relationship - financial or otherwise - to Metal Bulletin.]