Name: Iron ore time spreads indicate the market is overheated
Brand: Wood Mackenzie
SKU: 131889
Price: 1050 USD
Availability: OnlineOnly
Author: Wood Mackenzie

Insight 18 August 2020

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Report summary

The 62% Fe iron ore index has averaged $95/t so far this year. Our pre-COVID forecast for CY 2020 was $80/t. It is now increasingly clear that we underestimated the scale and timing of Beijing’s stimulus package targeted at steel intensive infrastructure. But there are other factors at play; including the flow of speculative money into the market. In this note we examine iron ore time spreads and how they compare to previous years. Spread levels are wide as the iron ore price continues to rally. We believe this signals selling potential, consistent with our supply/demand driven view that indicates lower prices in response to rising Brazilian supply and stabilising Chinese demand.

Executive Summary
We don’t think current iron ore market fundamentals justify such pricing
Q4/Cal+1 spread suggests downside risk for iron ore prices
Moreover, Q+1 vs Q+2 time spreads are trading at high levels compared to last year
The relationship between flat price and time spreads
A quick note on iron ore price volatility
In summary:

Tables and charts

This report includes the following images and tables:

Boxplot – M+1* since January 2018Q4 vs Cal+1* – SeasonallyQ+1 vs Q+2 – RollingSensitivity analysis on spot price vs front months spreadsIron Ore 20 days Annualised Price Volatility vs Price M+1*