Hazy outlook on iron ore
Steel mills in China asked to lower output to reduce emissions which could affect ferrous commodity's prices
The toxic smog that descends on China every winter has also cast a shadow on the prices of iron ore.
Along with other pollution-heavy industries, Chinese steel mills - which rely on iron ore for production - have been forced by the government to cut down on their output in a bid to reduce emissions.
But the bad air in China is probably just a blip for the ferrous commodity.
Last year, iron ore had defied expectations that it would continue three years of declining prices following a supply glut.
The benchmark iron ore spot price rose 85 per cent last year, closing at US$79.50 (S$114.20) per tonne. This reverses the losses seen in 2015 by a wide margin, according to the latest Singapore Exchange (SGX) report on commodities.
Prices of coking coal - another component of steel-making - has also seen a big rally this year. And most experts remain optimistic about the price of iron ore.
According to a Jan 5 report, majority of industry participants surveyed by SGX think average iron ore prices will either remain unchanged or trend higher than last year's, which saw an average of US$57.80 per tonne.
But Australia, which closely watches the prices of iron ore as it is one of its most valuable export commodity, is cautious.
A report released by Australia's Department of Industry, Innovation and Science on Monday noted that last year's price rally was temporary and backed by a resurgence in China's steel production and speculative trading.
Nonetheless, those investing in iron ore on SGX have also seen a record year in 2016. Iron ore derivatives saw robust growth last year, with volumes increasing 58 per cent year-on-year, to a record 1.7 billion tonnes.
...any unexpected supply disruptions from these two regions (Australia and Brazil) alone may have an increasingly significant bearing on global iron ore pricing.
SGX’s report on commodities
This is the first time the volume has exceeded the underlying physical market, noted the same SGX report.
SGX offers clearing, swaps and futures products to better manage risks associated with the wide fluctuations in these commodities prices. Surprisingly, Singapore, which is not directly involved in the demand and supply of iron ore, has a wide influence on its prices.
An October Goldman Sachs Group's report revealed that the SGX has greater pricing power than China's Dalian Commodity Exchange (DCE), with daily changes in Singapore consistently leading daily changes in Dalian. This is despite the trading volume of SGX's iron ore contracts being 20 times smaller than DCE.
The reason may be that institutional investors account for a greater share of trade in Singapore, noted the bank.
SGX iron ore futures are priced in US dollars while iron ore futures in Dalian, which are priced in yuan, is largely closed to offshore investors.
The Chinese contract drew attention last March and April, when a retail investors' frenzy in China spurred a surge in raw material prices and volumes which was later quelled by regulators, reported Bloomberg in October.
Although the Chinese steel industry is the main driving force behind iron ore prices, attention should also be paid to its supply, noted SGX's latest report on commodities.
The report noted: "...A period of strong supply growth has somewhat masked the growing supply concentration risk in the seaborne iron ore market, with well over 80 per cent of supply reliant on just two countries - Australia and Brazil.
"As a result, any unexpected supply disruptions from these two regions alone may have an increasingly significant bearing on global iron ore pricing."
In January, a Brazilian federal court had ordered a short-lived suspension of activities at Vale's Tubarao port, which accounts for approximately 8 per cent of seaborne iron ore supply.
The Trump effect may contribute to iron's price volatility. During his election campaign, President-elect Donald Trump had accused China of "dumping" steel on the US and promised to revive the steel industry in his country.
His trade transition team will consist of veterans of the US steel industry's battles with China, including Mr Wilbur Ross, a billionaire steel investor, Mr Dan DiMicco, the former CEO of steelmaker Nucor Corp, and three veteran steel trade lawyers.
Options for investing in iron ore
China is the main importer for global seaborne iron ore. Major iron ore producers include Australia and Brazil.
The Singapore Exchange (SGX) offers Iron Ore CFR China (62 per cent Fe Fines) Swap, Futures and Option.
As there is frequent divergence in the pricing of iron ore varieties, the launch of the SGX Iron Ore CFR China (58 per cent Fe Fines) Swap and Futures and SGX Iron Ore CFR China (Lump Premium) Swap and Futures will provide participants with effective hedging instruments and more trading opportunities.
Iron ore lumps typically command a price premium over iron fines, because fines must be formed into a mass by heat and pressure before being used by steel makers.
To meet the overall price risk management needs in the steel industry, SGX also offers a suite of products across the steel value chain, such as Coking Coal, Hot-Rolled Coil Steel and FFA.