S&P Global Platts announces merger of TSI-62% and IODEX iron ore indices
S&P Global Platts announced July 6, 2017 the merger of The Steel Index 62% and Platts IODEX price series following a month-long formal market consultation process which began May 15.
In this video, Ciaran Roe – Global Methodology Specialist, Metals – gives an overview of the feedback received during the consultation and explains the impact of this merger on the methodologies of the two prices.
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This video will cover the merger of the TSI-62% and Platts iron ore index, or IODEX, price series that will come into effect January 2nd, 2018. The decision to merge these two price series was announced on July 6th, 2017 after a month-long market consultation process which yielded a positive response to the proposed methodology changes.
After the merger, two identical values will be published for TSI and IODEX, while the names of these price series will remain unchanged.
To provide some background: on May 15th, Platts published a subscriber note marking the start of a formal market consultation into possible methodology changes to its TSI-62% and IODEX price series.
This proposal came on the back of increased market requests to eliminate the price difference between the two indices. These requests became more frequent as index-linked trade in the spot market became a regular feature and derivatives trade volumes increased.
TSI-62% is the underlying for the largest $-denominated iron ore derivatives contracts, while IODEX is the underlying for the majority of physical iron ore contracts. By merging the indices, Platts will be able to fully reflect floating indications in its assessment process. The merge will also eliminate the particular basis risk for market participants looking to hedge their IODEX-linked physical exposure via the derivatives contracts settling against the TSI-62% index.
Platts held a methodology forum in Singapore at the end of May and in Shanghai at the start of June to engage with market participants during this consultation. These forums saw attendance of more than 100 market participants.
On the back of these forums and on the back of dozens of bilateral meetings with market stakeholders, Platts collected in-depth feedback from a wide array of participants.
The feedback focused on the three key methodology changes proposed:
1) A change from a 6pm Singapore time cut-off to a 5.30pm time-stamp for the TSI-62% index
2) Formalizing the delivery window for the TSI-62% index to become 2-8 weeks forward from “within 8 weeks”
3) Adjustments to the IODEX specification
Feedback received during the consultation was positive regarding the proposed process, roadmap and timing for the changes to be effected. Here are the changes due to come into effect at the start of 2018 in greater detail:
TSI-62’s 6pm cut-off will change to become a 5.30pm timestamp—aligning with IODEX. Therefore, transactions, and competitive, firm bids or offers valid live at (or closest to) 5.30pm would be given highest priority in the index price.
Volume-weighted averaging will no longer be used in valuing the TSI-62% index.
Throughout the consultation process companies involved in the trade route noted that iron ore prices have been highly volatile and price formation is visible throughout the course of the day.
Platts aims to reflect this movement fully by timestamping its market assessment at a particularly busy period in the trading day.
Moving onto the second change: 2-8 weeks forward is the window within which more than 97% of observed spot deliveries fall.
The TSI-62% index will move to formally reflect these deliveries.
In conjunction with the visible intra-day price movement, market participants noted that cargoes are priced depending on when they are likely to be delivered to China. This physical forward curve can move from backwardation, to contango or be in a flat structure for the 2-8 week period.
The average of this 2-8 week physical forward curve will be used to value TSI-62, thereby maximizing data available while reflecting the potential for value differences caused by different delivery dates.
As part of this series of methodology changes, Platts will alter the specifications of IODEX to move the assessment further in line with the most liquidly-traded medium grade fines brands in the spot market.
In this graph, the observed spot trade of various brands is represented by the circles. The changes would be to silica, alumina and phosphorus levels as well as to the minimum cargo lot size under assessment.
A rationale for TSI-62% will be published. This rationale will describe how the final index value was reached and how data was treated by the assessment team. All the data used in the assessment will be visible in the rationale.
Platts already publishes a full, transparent rationale in its Steel Markets Daily publication which describes in detail how IODEX was assessed and lists all the data underpinning the assessment value. Feedback received during the consultation indicated that market participants would like further details included in this rationale around how indications are normalized using impurity penalties and premia, which Platts will provide going forward.
In addition to this, Platts will add new impurity penalty and premia bands. Platts will start to publish an alumina differential for ores containing 2.5-4% alumina and will also formalize publication of its silica differential for ores containing <4.5% silica.
In order to publish a rationale for TSI-62, Platts will discontinue receiving submissions pursuant to the existing TSI Data Provider Agreements for companies submitting to TSI’s Iron Ore indices.
Market participants also indicated a strong desire for a formal publication deadline; on the back of this feedback Platts is reviewing the possibility of introducing such a deadline for its merged price series.
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