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Indian Commodity Exchange Limited  ,[object Object],Presentation : Iron Ore Derivatives,[object Object],1,[object Object]
What are Derivatives,[object Object],Derivative is a financial instrument (or, more simply, an agreement ,[object Object],between two parties) that has a value, based on the expected future price,[object Object],movements of the asset to which it is linked—called the underlying asset,[object Object],—  as a share or a currency or a commodity  ,[object Object],Most common derivatives are swaps, futures, and options,[object Object],Derivatives are usually broadly categorized by:,[object Object],the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); ,[object Object],the relationship between the underlying asset and the derivative (e.g., forward, option, swap); ,[object Object],the market in which they trade (e.g., exchange-traded or over-the-counter); ,[object Object],their pay-off profile.  ,[object Object],2,[object Object]
Why Commodity Derivatives…,[object Object],Dynamic Price Discovery,[object Object],Transparency – Information Dissemination,[object Object],Hedging Tool,[object Object],Even smaller players reap same advantage as big ones,[object Object],Takes care of counter party default,[object Object],Easy to sell / buy in liquid market,[object Object],Leverage,[object Object],3,[object Object]
Iron Ore Derivatives,[object Object],4,[object Object]
Iron Ore Derivatives,[object Object],Anticipating the Needs of a Changing Market…,[object Object],[object Object]
The mining and transport of this raw material is capital intensive, which leads to supply constraints not readily filled by other materials.
These factors thus expose the steel mills not only to supply constraints, but also to transport uncertainties, which can lead to volatile price fluctuations.
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 shipments.5,[object Object]
What Impacts Iron Ore Prices?,[object Object],Steel-making Demand for Iron Ore,[object Object],Quality and Grade Specifications,[object Object],Available Supply,[object Object],Seaborne Freight ,[object Object],6,[object Object]
World Steel Scenario,[object Object],Global Crude Steel Production (Mt),[object Object],7,[object Object]
World Iron Ore Scenario,[object Object],[object Object]
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.8,[object Object]
World Iron Ore Scenario….contd,[object Object],It is anticipated that around 685-million tons of new production capacity may come on stream between 2010 and 2012.,[object Object],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.,[object Object],9,[object Object]
Global: Production, Consumption & Trade,[object Object],10,[object Object]
Top 5 Iron Ore Producing Countries ,[object Object],1. China   2. Brazil   3. Australia   4. India   5. South Africa,[object Object],Top 5 Iron Ore Consuming Countries ,[object Object],1. China   2. Japan   3. India   4. Russia   5. USA,[object Object],Top 5 Iron Ore Exporting Countries ,[object Object],1. Australia   2. Brazil  3. India   4. South Africa 5. Canada,[object Object],Top 5 Iron Ore Importing Countries ,[object Object],1. China  2. Japan  3. South Korea  4. Germany   5. Taiwan ,[object Object],Iron Ore : World Scenario,[object Object],11,[object Object]
Iron Ore : Indian Scenario,[object Object],[object Object]
4th largest producing country–218 Mt (FY 2009-10)
3rd Largest exporting country–117 Mt (FY 2009-10)12,[object Object]
Major & Intermediate ports for Iron Ore Exports,[object Object],13,[object Object]
Iron Ore : Indian Scenario,[object Object],14,[object Object]
Direction Of Trade,[object Object],15,[object Object]
Volatility & Changing Pricing Landscape,[object Object],[object Object]
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.16,[object Object]
Volatility & Changing Pricing Landscape..,[object Object],17,[object Object]
…. 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 ….,[object Object],Source: Iron Ore Market 2009-2011 (UNCTAD),[object Object],18,[object Object]
Daily Price Volatility (IO-TSI62%Fe),[object Object],19,[object Object]
  Example - Hedging,[object Object],It is January 2011 and the price for iron ore CFR China 62% Fe fines currently,[object Object],stands at $ 174.60/dmt.,[object Object],Buyer (Steel mill),[object Object],A steel mill in China expects to import iron ore 62% Fe fines of a Cape size,[object Object],shipload of 75,000 metric tons (mt) in March 2011 and wishes to fix this cost as,[object Object],they have just clinched a major deal to supply flat steel products in 2011.,[object Object],To hedge this position, this steel mill will bid at $169.00/dmt for March 2011,[object Object],Iron Ore Swap on CFR China 62% Fe Fines.,[object Object],Seller (Iron ore trader),[object Object],At the same time, an iron ore trader with an inventory of iron ore wishes to,[object Object],hedge against a possible decline in stock value from drop in iron ore rates. The,[object Object],trader would like to lock-in the iron ore price of $169.00/dmt.,[object Object],20,[object Object]
  Example - Hedging,[object Object],Buyer:			Steel mill,[object Object],Seller: 			Iron ore trader,[object Object],Product:			Iron Ore CFR China 62% Fe Fines,[object Object],Quantity:		75,000mt (750 lots),[object Object],Contract Price:		$169.00/dmt,[object Object],Settlement Date:		31st  March 2011,[object Object],Settlement Basis:	 Average of the spot price assessments of 				the contract month,[object Object],Due to natural calamity in Japan, the price of iron ore CFR China 62% Fe ,[object Object],fines falls from $174.60/dmt to $169.36/dmt in March 2011. As a result, ,[object Object],the steel mill doesn’t suffer an increase in input cost.,[object Object],21,[object Object]
 Hedge Result,[object Object],Buyer Steel Miller,[object Object],Physical,[object Object],Ease in cost = $2,62,000,[object Object],[(174.6-169.36)*500*100],[object Object],Futures,[object Object],Payoffs = $ 18,000,[object Object],[(169.36-169.00)*500*100],[object Object],Net,[object Object],P/L = $ 2,80,000,[object Object],[262000+18000],[object Object],Seller – Iron Ore Trader,[object Object],Physical,[object Object],Rise in Value = $2,25,000,[object Object],[(109-106)*500*100],[object Object],Futures,[object Object],Payoffs = -$2,62,000,[object Object],[(105.5-109)*500*100],[object Object],Net,[object Object],P/L = -$ 37,500,[object Object],[225000-262000],[object Object],22,[object Object]
 Benefits of Hedging,[object Object],[object Object]
Any gain or loss in the spot market offset (partially if not fully)with the loss or gain respectively in the derivatives market.

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