platts aluminum assessment methodologies actually narrowing 7 market commentary to explain...
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© 2013 Platts, McGraw Hill Financial. All rights reserved.
Platts Aluminum Assessment Methodologies
Karen McBeth, Editorial Director, Metals Pricing & Market Engagement
Tina Allagh, Senior Managing Editor
Sarah Baltic, Associate Editor
Platts Aluminum Symposium, Ft Lauderdale, Florida, January 14, 2014
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Major Metals Precious Metals Minor Metals Ferroalloys, noble alloys Stainless inputs Steel Iron ore Coking Coal Alumina Anode-grade calcined petcoke Scrap Dry Bulk Freights
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Platts’ Aluminum Coverage
• Platts assesses prices upstream to downstream, from alumina through billet
• Platts US Midwest Transaction price assessment a benchmark for 30 years, used to price not only ingot but also billet, sheet, foil, cable, etc.
• Other P1020 ingot premium assessments for key trading hubs (eg, CIF China, CIF Japan spot and quarterly, duty-paid and unpaid Europe)
• 9 secondary aluminum alloy prices for the three main geographic regions (eg. US A380, Europe 226, China ADC12)
• 10 US aluminum scrap price assessments twice-weekly or weekly
• Daily alumina pricing started in August 2010; calcined petcoke in May 2013
US premium trends since July 1
• July-August saw uncertainty after LME announcement, most spot deals done on floating (Platts Transaction price) basis rather than negotiated premium
• Nearly all market players predicted further premium drop, floor hard to find
• Predictions premium could go to 8¢ by end of 2013, 6-7¢ by 2014
• Discounts on formulas widened, even for average freights
• Offers of 8-8.5¢ for 2014 were rejected, Platts 6-months premium fell to 9¢
• Premium stabilized in October, bids resumed, trade bid 9-10¢, sellers at 9.5-11¢
• Curtailments, import costs, LME contango have lent support
• Premium to attract metal to US has risen based on higher premiums in Brazil, Europe
• Financing deals increasing to “beat” April rule change?
• Traders decided to hold off on sales, insist on “premiums” to the premium
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Analysis of US Premium Issues
• Unprecedented volatility caused by LME queues, wide contango, uncertainty, typical Q1 seasonal factors
• All-in price and premiums have been in backwardation vs LME contango
• Historical normalization matrix needs adjusting due to structural supply shifts – this may be temporary versus permanent
• Typical freight range higher basis current supply vis a vis consumers
• Standard quantity may need increased to 1,000 mt based on feedback
• Major market players still tend to prefer one US reference point given ease of pricing, likelihood of quick arbitrage adjustments, regional variations actually narrowing
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Market Commentary to Explain Assessments
• Platts editors always write market commentary or analysis of the transactions, bids and offers that went into the assessment
• Premium move to 19¢ yesterday was supported by data, explained in commentary on Platts Metals Alert and in Platts Metals Daily
Heards in the Markets on Platts Metals Alert
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Commodity markets structured around a spot price
Over the Counter
Market
Futures
Exchange
Term Contracts
Spot
• Spot prices assess the marginal physical business
• Platts spot benchmarks are used to price “floating” term contracts
• Over-the-counter swaps/ derivatives “price out” against averages of Platts spot price assessments
• Futures settlements are often tied to a market Platts covers
Role of Benchmarks
A benchmark
is used as reference
point in commodity
trading – and to
derive related
commodity prices
Benchmark is a
proxy for valuing
related commodities
Benchmark Pricing: What the Market Expects
Convergence between market values and
published values
Independence
Clear methodology based on industry input
Full transparency
Benchmarks evolve with greater transparency, standards
Initial Stage
First-tier players dominant
Direct trade is customary
Phone surveys
Standardization of practices
Assessments made daily
Market education process
Assessment windows
Participants named
Firm, open bids/offers
Price formation in real time
Defined audit trail
Performance-based trade
Middle Stage
Price range narrows
Longer trading chains
Brokers facilitate trade
Verification and traceability
Market activity in real time
Transparency increases
Advanced Stage
What is an assessment
• An assessment is a measurement of repeatable, transactable value of a commodity normalized to a published set of standards or specifications
• Without normalizing to a set time and specification, price ranges can be too wide, or mix unrelated data, so the user doesn’t get the price they expect
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Benchmarking is about defining standards
X X Assessment
specifications
Time of trade
Delivery timing
Quality
Volume
Location
Terms of trade
Credit & risk
Normalization: the art and science of converting all the dimensions of each unique transaction to a common standard, for price comparison
Firm bids and offers help price discovery
Bid
Offer
• Platts does not average high-ball or
low-ball reported deals, or subjectively
selected deals, or volume-weight deals
• Platts only uses bid, offer and deal
information tested openly in the active
marketplace
• Deals must be repeatable, verifiable
and arms length
• Market-on-close philosophy takes a
snapshot at time of assessment
Platts seeks full range of bids and offers, zeroes in on tradable value
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Platts US P1020 premium specifications
Grade: 99.7% P1020/A7E ingot, sow or T-bar, LME deliverable
Volume: Minimum full truckload, typically 100-500 mt orders
Timing: Assessment reflects delivery within 7-30 days forward from date of publication
Basis and location: Basis delivery US Midwest, with typical freight defined as 1.25-1.75¢/lb (close or extra freights are normalized) . Platts uses a matrix of typical delivery locations, and categorizes these as “average,” “close” and “extra” freights
Transportation: Truck or rail
Payment terms: Assessments reflect net-30 days from delivery (net-cash, net-5, and net-10 are normalized using prevailing net-cash versus net-30 spreads determined through survey)
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Platts P1020 Normalization – Location and Freight
• Price levels are adjusted for assessment purposes based on the premium or discount for each location • “Average” locations based on liquidity of supply options within 1.25-1.75 ¢/lb • Feedback constantly sought as these relationships change
Other Normalization Factors
• Must ship within one week (Platts typically deducts 0.25 cents) • Specific as to shape (Platts has deducted 0.25 cents) • Specify no lithium (Platts has subtracted 0.25 cents) • High profile sows (Platts adds back 0.25 cents) • Net-cash (Platts adds 0.3 cents) • Net-60 (Platts subtracts 0.3 cents) • Location can only be served by truck or rail (varies, to be
determined) • Perceived weak credit (subjective element)
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Normalization Matrix Structural Changes
• Smelter closures or cuts: Ormet (Ohio), Century (KY), Alcoa (TN, NY, Texas), Alcoa/ RTA (Quebec) • Sebree, Kentucky, smelter ownership change appears to have changed spot availability • Imports currently low unless premium rise attracts new metal • Average freight range now driven by distance from Detroit, maybe Canada, feedback 2-4 ¢ to most MW • Kentucky, Northeast, Southeast are less likely to see discounts
Ohio?
Truck vs rail becoming more critical?
Mobile imports
Detroit supply
Mt Holly, Charleston port
Toledo
Canadian supply
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Platts Pricing Philosophy
• Platts does not forecast or offer consulting on prices, completely objective
• Platts editors report and analyze physical deals in the market every day, plus leading indicators and fundamental data
• Surveys are done consistently, rigorously per stated frequencies, not ad hoc, so market moves are not missed
• Daily pricing wherever possible, or else weekly/twice-weekly
• Editors experienced with cross checking of data, numerous sources, knowledge of players and market
• The Platts methodology has stood the test of time and been applied across many commodities
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Transparency and Governance
• Platts’ editors are pre-trained in pricing, become experts a market, must adhere to Code of Ethics for both MH Financial and Platts
• Platts invests heavily in its governance and controls, to ensure Platts’ assessments and publications are objective, unbiased and produced consistently with Platts’ policies and methodologies. Has worked closely with regulators, IOSCO.
• Transparency is paramount to price discovery. Platts publishes its methodologies on its website and, in markets using its MOC process, identifies all bids, offers and transaction data by company name. In markets where the MOC process is not yet the market standard, Platts seeks to publish as many specific details about firm bids, offers and transactions as possible, including counterparty names when available.
• Platts’ rules governing price assessing require that any offer or bid out of line with prevailing market value be eliminated in the price assessment process.
• Surveys are extensive and must include all sides of the market. It is not possible for a single trade out-of-line with the market to affect a Platts assessment.
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Transparency in practice
What is transparency? Transparency is the quality that makes it possible for
observers to know the transactable price for a commodity and the reasons for that price
Transparency can include naming counterparties attached to deals or naming survey participants, but in particular the details surrounding a transaction are critical to price discovery
Benefits of transparency Builds confidence in the reliability of pricing Contributes to “price integrity” and “price discovery” Creates level playing field, especially in illiquid markets Allows participants to broadcast intent to buy or sell Enables participants to prove a “floor” or “ceiling”
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Benefits of transparency
• Creates a level playing field in the marketplace, especially in illiquid markets
• Allows market participants to widely broadcast their intent to buy or sell
• Allows participants to prove the “floor” and/or “ceiling” in a particular market, contributing to price discovery
• Contributes to the robustness of the underlying assessment, which helps with risk control/compliance
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Transparency in practice
Platts metals team announced its transparency initiative for US P1020 aluminum on November 3, 2008, a first step toward a more robust, time-sensitive assessment process called “Market on Close”
Progress toward transparency on Platts Metals Alert in February 2009 was stalled by credit crisis, debate over payment terms
Platts added its net-cash P1020 premium in June 2009, has increased reporting of premium swaps, discounts, off-grades
Transparency must be constantly enhanced by updating underlying specifications and normalization practices
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What is the Platts’ Market on Close assessment process?
Interactive, price discovery process where the market itself is the testing ground
Use of real-time technology enables market participants to interact with the marketplace
All price information must be available to the market at large
Market must have sufficient time to react to bids and offers
A culmination-of-day process brings clarity to end-of-day market values
Assessments reflect transactable values at a particular point in time during the trading day
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Examples of transparent bids/offers
• 12Feb09/1009 am EST/1509 GMT: Al, 99.7% P1020--Alexin seeks 2 million lb of P1020 for prompt delivery to Bluffton, Indiana, at 3.75 cents/lb plus LME cash settlement, net-45-payment terms
• 12Feb09/1111 am EST/1611 GMT: Al, 99.7% P1020--Mitsubishi offering 2 million lb of P1020 at 4 cents/lb plus LME cash settlement, delivered Bluffton, Indiana, cash in advance, within 30-day delivery
• 12Feb09/1115 am EST/1615 GMT: Al, 99.7% P1020--Glencore offering 1.5 mil lb of P1020 at 4 cents/lb plus LME cash settlement, delivered Bluffton, Indiana, net cash payment terms, within 30-day delivery
• 17Feb09/ 932 am EST/1432 GMT: Al, 99.7% P1020--Rio Tinto Alcan offers at 4.75 cents/lb plus LME cash settlement for February, delivered generic Midwest locations, net-30-day-payment terms
• 25Feb09/1153 am EST/1653 GMT: Al, 99.7% P1020--Rio Tinto Alcan offers 500 mt of P1020 at 4.35 cents/lb plus LME cash settlement for March, delivered generic Midwest locations, net-30-day-payment terms
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More demand for hedging of premiums
• Premiums in Europe, the US and Japan set new record highs
• Premiums now account for more than 20% of the high-grade aluminum price, up from 2-4% in 2008 and 5% in 2005
• More concern by consumers about difficulty of hedging rising premiums
• Wider variance with exchange price for marking to market
• Fewer players, new rules have led to fewer brokers offering OTC swaps
• Exchanges stepping up to do more financially-settled swaps
Platts US Transaction premium trading on CME
• CME launched Platts Premium swap on Clearport in April 2011 • Moved to Globex in December 2012 due to market demand • Examples of trades to date:
• Aug 9 – Nov/Dec traded at 10¢, • Oct 23 – March/Apr traded at 8.75¢ • Oct 30 – Nov traded at 10¢ • Dec 17 – Jan traded at 12¢ • Jan 7 – Feb-Apr traded at 16.5¢, Feb traded at 17¢
Platts US Transaction premium trading on CME
• More bids and offers being posted on CME by multiple brokers • Other exchanges may also be considering contracts for global premiums • Market has seen exits of some OTC premium swap players but others emerging
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Global Aluminum Team and Management
Karen McBeth Editorial Director, Metals Pricing & Market Engagement Washington, DC Email: [email protected] Joe Innace Editorial Director, Metals New York, NY Email: [email protected]
Sarah E. Baltic Associate Editor, Markets, Pittsburgh, PA Email: [email protected] Joanna Lim Senior Editor, Markets, Sydney, Australia Email: [email protected] Sui Ling Phang Associate Editor, Markets, Singapore Email: [email protected] Jackie Roche Associate Editor, Markets, New York, NY Email: [email protected] Greg Smart Associate Editor Markets, London Email: [email protected] Mayumi Watanabe Senior Editor, Markets, Tokyo Email: [email protected] Alvin Yee Associate Editor, Markets, Singapore Email: [email protected]
Tina Allagh Senior Managing Editor, Washington, DC Email: [email protected] Andy Blamey Senior Managing Editor, EMEA, London Email: [email protected] Christopher Davis Senior Managing Editor – Americas, Pittsburgh, PA Email: [email protected] YuenCheng Mok Senior Managing Editor, Singapore Email: [email protected]