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SGX: Iron Ore: Calm before the Storm?




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Market Updates

7 February 2018


Iron Ore: Calm before the Storm?

  • Iron ore price volatility has been deceptively low in the first month of 2018. However, trading volumes grew 14% m-o-m and 6% y-o-y. Interestingly, options volume contributed 22% - a larger portion - of volumes compared to 10% last month and 16% last year.

  • Potential price drivers include environmental policies in China, weaker demand for steel, and expanding global supply. Analysts are forecasting 2018 average price to come in around $62.

  • In 2017, SGX cleared more than 95% of international iron ore derivatives. Liquidity across the forward curve creates opportunities for calendar spread trading. With coking coal derivatives also gaining traction, SGX provides a single platform for trading the steel value chain - iron ore, coking coal, and FFA.


Iron Ore Price Volatility

Iron ore 30d annualized price volatility for January 2018 has been hovering around 26%. While this may seem high relative to other asset classes, historical volatility is typically around 35%. In 2016, this even reached a high of 77%.


Iron Ore 30D Annualised Price Volatility

However, despite the low volatility, trading interest grew 14% m-o-m and 6% y-o-y. SGX volumes in Jan 2018 reached 112 mil metric tonnes. Interestingly, options volumes accounted for 22% of total volumes. This is higher than the proportion last month (10%) and last year (16%). This reflects an uncertain price environment where there is demand for the optionality that is provided by an option. Is current low price volatility the calm before the storm?

Looking ahead, there are a number of potential price drivers. First, on the demand side, when China's winter steel production cuts finally come to an end in March, traders are expecting a flurry of restocking as steel mills ramp up production to normal levels. However, growing raw material inventories suggest some mills may already be well-stocked. There is also uncertainty around new environmental policies which may drive grade differentials. In general, the market expects weaker Chinese demand this year. Second, on the supply side, major miners have all announced new and expanding production capacity that will be coming online in 2018. This is expected to lead prices lower amidst weaker demand from China. Third, most predictions for 2018 average iron ore prices are around $60. This is below current futures price levels. Volatility in USD FX is also expected to impact iron ore prices.



Trading the Steel Value Chain

SGX cleared 1.6 billion metric tonnes (15.9 mil contracts) of iron ore in 2017, accounting for more than 95% of international iron ore derivatives. While the 2nd contract month is the most active contract, liquidity across the forward curve presents opportunities for trading calendar spreads. Unlike some other commodities, the iron ore forward curve is normally in backwardation as lower-cost future supply is expected to replace existing higher-cost production. More about why the curve slipped into contango last October here (EN CN).


Jan-18 Volume by Contract Months (mil mt)

SGX also offers futures for coking coal (including options), iron ore lump premium, steel, and FFA. This creates opportunities to trade inter-commodity spreads such as the ratio of iron ore to coking coal or FFA prices. In particular, the hot metals spread represents a way to gain exposure to steel mill margins, which has been especially volatile as of late. When clearing multiple commodities, SGX offers margin offsets to ensure capital efficiency.


Hot Metal Spread ($/mt)

Steel Mill Margins = HRC Steel Price - (1.6 x Iron Ore 62% Price) - (0.77 x Coking Coal FOB Australia Price)

Delayed prices available here.
Real-time prices available on Bloomberg (SCOA Comdty CT) and Reuters (SZZF).

More historical reports and articles are available at the Knowledge Centre on our website here.

For further details on SGX iron ore products, please contact our team at or visit our website:

Recent publications
Iron Ore Options Weekly Report - 29 Jan - 2 Feb 2018 (EN CN)
Bulks Monthly Report - January 2018 (EN CN)
Freight Derivatives - Expanding Interest (EN CN)
Iron Ore - Time to contango? (EN CN)
SGX Iron Ore Lump Premium: A seasonal and policy driven growth story (EN CN)
SGX Freight - 10 things you should know about the IMO 202 Global Sulfur Cap (EN CN)
Iron ore Lump - Daily Focus (EN)
10 takeaways from Singapore Iron Ore Week 2017 (EN CN)
Highlights of the 5th Singapore Iron Ore Week (EN CN)
SGX Commodities Awards - Celebrating Key Milestones in 2016 (EN CN)
Asian LNG Pricing - On the Cusp of Transformation (EN)
Structural Change in the Iron Ore Lump Market (EN CN)
The Internationalisation of Asian Steel (EN CN)


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