Traders are ‘gaming’ iron ore market, says Odey

Odey Asset Management has called for closer oversight of the iron ore market in Asia and greater involvement from the world’s big producers to prevent benchmark prices being “gamed” by trading houses.

Speaking this week at a conference organised by S&P Global Markets in Singapore, Henry Steel, who runs the Odey Concentrated Natural Resources Fund, said the methodology used to set benchmark prices for the key steelmaking ingredient was flawed.

The benchmark price for iron ore is not set on exchange but through price assessments. Groups such as S&P Global Platts call producers, traders and steel mills and ask them about sales they have completed in the so-called spot market.

From these deals they derive a benchmark, or index price that is published at the end of the day. The most commonly referenced price is the S&P Global Platts IODEX 62 per cent Fe CFR China benchmark.

This is used as a yardstick for the iron ore market and also to price long-term contracts between miners and steel mills and settle derivative contracts.

“It is quite clear that the three [iron ore] markets are being gamed by some trading houses in Asia,” Mr Steel in an interview with the Financial Times, referring to physical spot, long-term contract and derivatives markets.

Mr Steel said if prices were to reflect the reality of the iron ore market — and were less volatile — then big producers would command a higher stock market rating because their earnings would be more predictable.

Iron ore is the key source of income for miners including Vale, Rio Tinto, BHP and Fortescue. Prices have swung wildly this year, rising from $72 a tonne in January to a five-year high above $126 a tonne in July following supply disruptions in Brazil and Australia. It has since slid back to $86.65 a tonne.

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Mr Steel, who used to work for Rio, said games could be played in the spot market to influence the derivatives market. In a presentation prepared for the conference, he gave the example of a commodity trader making a large bullish bet in the derivatives market and then buying small cargoes of iron ore in the spot market in attempt to drive up the index price.

“Odey does have a point,” said Andrew Glass of Avatar Commodities, a Singapore-based consultancy, and a former senior trader at Anglo American. “The index could get manipulated — but I don’t see much evidence of that.”

Mr Steel said there needs to be greater oversight of the market to prevent abuse. He called on big producers to contribute more tonnes to the spot market and improve liquidity. Only 10 to 15 per cent of sales in the 1.5bn tonne a year seaborne iron ore market are done in the spot market.

S&P Global Platts said in a statement: “All our price assessments, including the iron ore IODEX 62 per cent Fe CFR China benchmark, aim to reflect the way the market trades through an independent price assessment based on fact and transparent data.”

It added: “No group of market participants is favoured. Participation is voluntary and Platts price assessors obtain information from market participants including buyers, sellers, traders and brokers.”


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