--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 26 Iron ore swaps
traded in Singapore are suggesting that the worst may be over
for the steelmaking ingredient, but futures in the Chinese city
of Dalian point to further price weakness.
Both can't be correct, but the divergence of the two
contracts does raise the question as to which group of investors
has a more accurate gauge on the current balance of risks.
The Singapore Exchange (SGX) iron ore swaps <0#SGXIOS:> tend
to be favoured by miners and traders, while the Dalian Commodity
Exchange (DCE) futures <0#DCIO:> are mainly used by Chinese
steel mills and domestic investors.
The SGX iron ore swaps curve tends to move into
backwardation prior to a price decline, reversing the process
ahead of a rally by moving into contango.
The shape of the current SGX curve is extremely mild
backwardation from the second month onwards, with the
second-month contract priced at $97.25 a tonne early on Monday,
the six-month at $96.58 and the 12-month at $97.
Spot iron ore .IO62-CNI=SI has been on a downtrend since
Dec. 4 last year, when it fetched $139.70 a tonne. At that time
the SGX curve was steeply in backwardation, with the
second-month contract at $137.56, the six-month at $127.50 and
the 12-month at $118.88.
The curve was last in significant contango in early June
2013, just as iron ore started a rally that saw it move from
about $110 a tonne to a peak of $142.80 on Aug. 14 of that year.
So, the current shape of the SGX curve doesn't yet imply an
imminent rally as it is still backwardated, even if ever so
slightly, but it also doesn't imply further price declines given
the backwardation has almost disappeared in recent weeks.
The DCE iron ore contract, launched in October last year,
has a shorter history, but it has quickly attracted volumes and
the second-month future's open interest was 2,108 lots as of May
Over its history it has tended to trade mainly in
backwardation, but this is hardly surprising given that spot
iron ore has been declining since early December last year.
Currently the DCE curve is steeply backwardated at the front
end, easing slightly further out.
The backwardation at the front end of the curve is currently
the steepest in the short history of the product, illustrating
the point that DCE investors are probably more bearish on iron
ore now than at any time during the past six months.
The second-month contract was at 769 yuan ($123.43) a tonne
on May 23, a premium of 8.7 percent to the six-month.
This compares to a premium of 2.5 percent that prevailed on
Oct. 29 last year, just ahead of a mild rally in spot iron ore
that saw the price go from $131.30 a tonne to $139.70 on Dec. 4.
The only other time in the life of the DCE contract that
there has been a rally in iron ore prices was from March 10 to
April 9, and just prior to this period the second-month future
was at a premium of just 1.2 percent to the six-month.
The DCE curve implies that further iron ore price weakness
is likely in the coming months.
DIFFERENT INVESTORS, DIFFERENT OUTLOOKS?
The question is how to resolve the different signals from
the two main markets for iron ore swaps and futures.
It's possible that investors using the SGX contracts are
more likely to respond to short-term price signals and news
An example would be the recent focus on the possible
disruption of exports from Australia's Port Hedland, with
tugboat workers threatening to strike at the harbour, which
handles about half of the shipments from the world's biggest
iron ore exporter.
The strike was averted last week when the workers agreed to
suspend any action for 30 days to allow for more talks with
tugboat operator Teekay Shipping.
News that the flash reading for HSBC's China Purchasing
Managers' Index rebounded in May, coupled with record iron ore
shipments from Australia to China in April may also have
contributed to a view that the worst is over for prices.
Chinese domestic investors using the DCE futures may be more
likely to focus on the longer-term structural issues facing iron
ore demand, such as the downturn in residential construction,
weak profitability and over-capacity in steelmaking, and
pressure to reduce pollution from coal, the main fuel for blast
Both groups of investors are also probably concerned about
the impact on prices from rising supply.
Australian exports to China were 47 million tonnes in April,
a jump of almost 46 percent on the same month last year.
This shows that the wave of supply from new mines and
expansions is starting to hit, with an additional 240 million
tonnes of new supply expected to be brought on line this year
This makes the bearish view presented by the DCE futures
curve the more likely scenario on a 12-month view.
However, the SGX curve suggests price stability for the next
few months, which is possible if China's seasonal steel demand
does pick up for summer and the PMIs confirm a manufacturing
recovery is underway.
(Editing by Tom Hogue)