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Iron Ore Trading: A review of the State of the Art

By : Ziad K. Abdelnour| 16 September 2013
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For those who haven’t done business with us in the past, Blackhawk Partners is a reliable trader and supplier of a wide range of commodities to industrial and financial consumers globally.

The Firm’s customers around the world rely upon us as a source of Metals and Minerals and Crude Oil and Oil Products.

One of the major commodities we have been extensively trading for some time now – in the physical market – is Iron Ore.

For the rookies in the business who want to enter this highly lucrative market, Iron ores are rocks and minerals from which metallic iron can be economically extracted. The ores are usually rich in iron oxides and vary in color from dark grey, bright yellow, deep purple, to rusty red.

Ores carrying very high quantities of hematite or magnetite (greater than ~60% iron) are known as “natural ore” or “direct shipping ore”, meaning they can be fed directly into iron-making blast furnaces. Most reserves of such ore have now been depleted.

Iron ore is the raw material used to make pig iron, which is one of the main raw materials to make steel.

98% of the mined iron ore is used to make steel. Indeed, it has been argued that iron ore is “more integral to the global economy than any other commodity, except perhaps oil – the other major commodity we at Blackhawk trade in the physical market too.

Iron is the world’s most commonly used metal – steel, of which iron ore is the key ingredient, representing almost 95% of all metal used per year. It is used primarily in structural engineering applications and in maritime purposes, automobiles, and general industrial applications (machinery).

Iron-rich rocks are common worldwide, but ore-grade commercial mining operations are dominated by China, Australia, Brazil, India and Russia. The major constraint to economics for iron ore deposits is not necessarily the grade or size of the deposits, because it is not particularly hard to geologically prove enough tonnage of the rocks exist. The main constraint is the position of the iron ore relative to market, the cost of rail infrastructure to get it to market and the energy cost required to do so.

Mining iron ore is a high volume low margin business, as the value of iron is significantly lower than base metals. It is highly capital intensive, and requires significant investment in infrastructure such as rail in order to transport the ore from the mine to a freight ship. For these reasons, iron ore production is concentrated in the hands of a few major players.

World production averages two billion metric tons of raw ore annually. The world’s largest producer of iron ore is the Brazilian mining corporation Vale, followed by Anglo-Australian companies BHP Billiton and Rio Tinto Group. A further Australian supplier, Fortescue Metals Group Ltd has helped bring Australia’s production to second in the world.

Australia and Brazil dominate the seaborne trade, with 72% of the market. BHP, Rio and Vale control 66% of this market between them.

Over the last 40 years, iron ore prices have been decided in closed-door negotiations between the small handful of miners and steelmakers which dominate both spot and contract markets. Traditionally, the first deal reached between these two groups sets a benchmark to be followed by the rest of the industry.

This benchmark system has however in recent years begun to break down, with participants along both demand and supply chains calling for a shift to short term pricing. Given that most other commodities already have a mature market-based pricing system, it is natural for iron ore to follow suit.

To answer increasing market demands for more transparent pricing, a number of financial exchanges and/or clearing houses around the world have offered iron ore swaps clearing. The CME group, SGX (Singapore Exchange), London Clearing House (LCH.Clearnet), NOS Group and ICEX (Indian Commodities Exchange) all offer cleared swaps based on The Steel Index’s (TSI) iron ore transaction data. The CME also offers a Platts based swap, in addition to their TSI swap clearing. The ICE (Intercontinental Exchange) offers a Platts based swap clearing service also. The swaps market has grown quickly, with liquidity clustering around TSI’s pricing. By April 2011, over US$5.5 billion worth of iron ore swaps have been cleared basis TSI prices. By August 2012, in excess of one million tonnes of swaps trading per day was taking place regularly, basis TSI.

We at Blackhawk believe iron ore prices are likely to remain at the current level or move up in the coming months on the back of supply issues in the mining sector, coupled with global cues where also prices are trending up..

Global iron ore prices have increased since June, and are currently in the range of USD 130-140 per tonne.

We do not expect iron ore prices to slide meaningfully from the current levels given that steel prices have risen recently.

If you are a miner or an operator with track record in need of significant capital in moving iron ore quickly and efficiently please let us know

Typical Due Diligence Questions we undertake are all listed as per below:

1. Information about the company:

a) Name of the mine and/or name of project:
b) Name and details of the shareholder(s):
c) Size of the company on NAV basis – Net Asset Value (does the company owns assets in the region? if yes pleases advise value/location):
d) Where the company is registered. Which company will be the contractual counter party:
e) Commercial references:

2. Information about the mine:

a) Location of the mine:
b) Estimated reserves/resources:
c) JORC studies: measured, indicated, inferred resources:
d) Quality of the material (need copy of the SGS analysis report):
e) Which process was used to ascertain the quality:
f) Please advise details of the geologic studies:
g) Licenses – please advise if all environmental/legal/operational licenses are in order:
h) Estimated monthly production and when they expect to start the production:
i) Estimated period of the 1st shipment:
j) How much of the production will be allocated in long term agreement?

3. Information about the inland logistics:

a) Complete information about the logistics of the project including distance/transport time to the port, breakdown of each modal (trucks, rails, pipelines, barges etc):
b) If trucks being used, please advise number of trucks and name of the company providing the trucks (has the contract being signed).
c) If rails please advise number of wagons and also if any agreement with the rail company:
d) Same for barges:
e) USD/ton for each modal: USD Cost per MT, for Mine to Port transport;
f) Which are the companies involved in each modal?

4. Port (or ports):

a) If the terminal that will be used is private or public:
b) Any contract/agreement has been made with the port:
c) Stock capacity at the port and where the cargo will be stored at the port:
d) Draft:
e) Size of the shipment:
f) Loading method (shore cranes/grabs):
g) Loading speed per day:
h) Any contract has been done with the stevedores/terminal?

5. Finance:

a) Breakdown of FOB costs:
b) Capital needed and breakdown of how the capital will be used:
c) Repayment prospects:
d) Pricing strategy, ie fixed or formula based:
e) Talking to any competitors/steel players:

We look forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Have a great day

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