The Singapore Exchange said Wednesday that lower sulfur requirements for bunker fuel from 2020 may lead to a squeeze in FOB price differentials between 62% Fe iron ore and 65% Fe prices. This is due to the potential for higher freight costs resulting from the lengthier voyage time from Brazil, with Australia at a comparative advantage.
The implementation of a reduced sulfur cap on fuel oil to 0.5% maximum sulfur from January 2020, from 3.5% sulfur at present, “will inevitably impact iron ore prices as miners are forced to absorb the increased shipping costs or try to pass them onto the end-user,” SGX said in a statement.
The International Maritime Organization’s directive to lower the maximum permitted sulfur content in fuel oil for shipping has led analysts to warn of higher costs and difficulties in meeting demand from the specification change due to refinery infrastructure.
The iron ore market in China, the largest buyer, evaluates seaborne iron ore prices on a delivered basis across grades and with domestic supplies. Spot prices delivered into China are a global benchmark, and higher shipping costs may lead to changes in netback prices and costs absorbed by counterparties, as well as offer interest determined by regional netbacks.
Brazil’s Ponta da Madeira terminal exports Carajas iron ore, which is a main spot trade reference for 65% Fe iron ore fines.
Concentrates and pellet feed from markets such as Brazil, Chile, Peru, Canada, Europe and Russia may also price with reference to 65% Fe fines.
“Theoretically higher fuel oil costs will give Australian miners an economic advantage when pricing contracts to China, given the shorter voyage distances compared to Brazil, which in turn could elevate the 62% Fe FOB price relative to 65% Fe FOB price,” SGX said.
The voyage from Ponta da Madeira, close to the Maranhao state, northeast Brazil-based city of Sao Luis, to Qingdao in north China, is around 12,000 miles, while the journey from Western Australia’s Port Hedland is around 3,500 miles.
“The added complexity of IMO 2020 will create unique trading opportunities for both the freight and iron ore market,” SGX said.
The SGX offers futures contracts based on iron ore delivered into China and clearing in both iron ore and freight derivatives markets. Interest to trade the 65% Fe delivered China futures contract increased since launch in December with 3 million mt traded in just over two months and more participants registering to trade the contract, SGX said.
Market participants may see interest to lock in CFR iron ore prices and trading grade spreads and hedging FOB iron ore prices by origin, using different freight routes and iron ore delivered derivatives.
This may prevent price risk from changes in outright prices and offer availability, due to volatility in demand, as well as government directives affecting the steel and mining sector, and overall supplies and shipping costs.
Source: Hellenic Shipping News.