Iron ore future contracts are going to give a tough competition to the future contracts of bullions and energies in the coming years as the volatility in iron ore prices intensifies. The recently introduced iron ore futures contracts, which are being traded in the Singapore Mercantile Exchange, experienced a wild swing of price movement in the month of October and November. The CFR price of high grade iron ore to China plunged from its peak of $190/metric tonne in September to $115/metric tonne in October which is a staggering 40% fall in less than a month’s time. A dramatic pull back was witnessed in the 1st half of November wherein iron ore prices recovered to $149/metric tonne, giving a 30% increase from lower levels. The high volatility in iron ore prices are there to stay as the global financial crisis on one side and the supply-demand factor on the other side is going to have a tug-ofwar for months to come.
The iron ore price drop in October was somewhat similar to the pre-Beijing Olympics days, where the global recession pulled down the iron ore prices to more than 60% in less than a month’s time. Astark difference between the two scenarios is that the 2008 drop was coupled with steep fall in freight rate (more than 80% fall) whereas the current volatility is purely on iron ore prices. This implies that the inherent risk factor in iron ore price movements over the years have increased considerably and it is high time for the market participants to adopt a risk management tool, like iron ore futures, to reduce their profit volatility.
The European financial crisis is looming largely over the consumer confidence across the globe which can affect the Chinese exports of finished iron and steel products considerably. Even though Australian and Brazilian ore supply to China is at normal levels, the Indian iron ore supply to China is severely affected. Anticipating the supply disruption from India, Chinese steel makers have ventured for South American countries to suffice the deficit but the Indian iron ore dependency cannot be replaced so shortly. Indian iron ore to China carries various advantages which most of the other ore supplying countries cannot match. After the Shah commission’s report in December, if exports from Goa also gets affected it is sure to have a serious implication for the Chinese importers and to the ore prices.
Indian exporters are having a void scenario in front of them as it is unclear whether they will be able to do exports from any part of India in the coming days. Karnataka is already closed for exports for many months and the scarce mining in Orissa has resulted in zero material availability from many mines. If Goa also to be affected, the already struggling export community will have a serious trouble. The iron ore exports from India is hard to reach even 70 million metric tonne for the current financial year as against the 95 and 115 million metric tonne which we did for the previous years, respectively. Indian iron ore exports is staring at 25% drop on y-o-y basis whereas China has imported more than 557 million metric tonne as of October 2011, which is a 11% increase on a y-o-y basis.
(Complied by Praveen Kumar, Chairman, Maya Iron Ores)
