Tuesday, November 14, 2017

Questions America Wants Answered: "The iron ore contango: Why now?"

From Platts' The Barrel blog:
The iron ore forward curve has made history in November by recording the longest period of contango* in its brief existence.

On November 1, Platts assessed The Steel Index 62% Fe CFR China swaps in contango from the December strip out to Q2 2018, which has been sustained until now. 
Unlike many bulk commodities in recent years, iron ore’s forward curve has remained stubbornly backwardated, with prices further down the curve being lower than those at the prompt.
This has puzzled many market observers.

In commodity markets a contango tends to signal supply outweighing demand.
In other major commodities, when supply has patently swamped demand – see Brent crude oil futures roughly between Q3 2014 and Q3 2017 – the forward curve reacted swiftly, moving from backwardation to contango.

In iron ore, though, even in the regular periods where either demand has fallen away or supply has grown acutely, the curve has remained backwardated.
Iron ore seaborne price
It should be stated that today’s market situation in iron ore thoroughly supports a contango structure.
Due to attempts to prevent air quality worsening during the heating season in China, steelmakers in the world’s largest-producing nation are being asked to cut back, particularly in sintering – the process that uses iron ore fines (the product on which derivatives contract prices are based)....