Feasibility Study of Iron Ore Futures Contract

Feasibility Study of Iron Ore Futures Contract
Summer Internship Report

2009 – 2011
Submitted By
Vinay Madaan
KHR2009PGDMF143
In partial fulfillment of Post Graduate Diploma in Management
Company Guide Faculty Guide

Mr. Dharmesh Pandya Prof. Rakhi Shrivastava
ITM Business School, Navi Mumbai, Kharghar Page 1

Acknowledgement
First of all, I wish to extend our heartfelt gratitude to Indian Commodity Exchange (ICEX)
for giving the opportunity to perform Summer Project at their esteemed organization in
Mumbai Corporate Office. I take this opportunity to convey my sincere thanks to the
Company Guides, Mr. Dharmesh Pandya (National Business Head) and Ms. Harkiran
Kaur for mentoring, guiding and supporting throughout the project. I sincerely owe a deep
sense of gratitude to all the helpful people at ICEX Business Development Department and
wish to put it on record that the present project had not taken its present shape without their
support.
Finally I would like to thank ITM Business School and Prof. Rakhi Shrivastava, faculty
guide for rendering her valuable time, knowledge and also for encouraging and appreciating
my work. I would like to specifically mention that I have been highly benefitted by the
experiences at ICEX as it helped me to imbibe managerial lessons.
Vinay Madaan
KHR2009PGDMF143
ITM Business School, Navi Mumbai

Executive Summary
In this dynamic world where one is introduced with a new commodity almost every day,
people think of understanding and managing the respective commodity with an intention of
earning something out of them. With millions of commodities around, only some qualify to
provide returns enormously. Some of them are like precious metals such as gold and silver.
And another commodity which drives various economies around the world is iron ore.
The project was envisioned in order to find the feasibility of iron ore as a futures contract to
be traded in Indian commodity market. The study was based on interacting with real time
traders by making them understand the benefits which ICEX provide such as transparency,
swiftness and cost effectiveness. It involves visiting the gold commodity market and copper
commodity market and converting them into a member of ICEX, thus also understanding the
current trends being followed by these traders and in the markets. Along with this a
secondary research was performed through internet and iron ore oriented books & journals to
search for comprehensive data on iron ore to find its feasibility. Thus on the basis of above
studies and market experience, this report suggested various measures and facts which proves
the feasibility of iron ore futures contract in India commodity market.
Besides this, it also elucidates the commodity profiles of gold and iron ore, with gold as a
commodity being traded the most in the Indian commodity market.
Vinay Madaan
KHR2009PGDMF143
ITM Business School, Navi Mumbai

DECLARATION
I, Vinay Madaan hereby declare that the Summer Internship project report entitled
Feasibility Study of Iron Ore Futures Contract in India at Indian Commodity Exchange
(ICEX) under the guidance of Mr. Dharmesh Pandya (company Guide), submitted to
Professor Rakhi Shrivastava for the partial fulfillment to the award of degree of PGDM
programme in ITM Business school, Kharghar, Navi Mumbai is my original empirical-
research study, carried out from 11th May 2010 to 11th July 2010 and the same has not been
submitted to any other institution / organization for the award of any other degree / diploma /
fellowship of other similar titles or prizes or university by any other person. I further declare
that all the facts and figures furnished in this project report are the outcome of my own
intensive research and findings.
Place:
Date:
Name_______________________

CERTIFICATE
(From Faculty Guide)
This is to certify that the project entitled “Feasibility Study of Iron Ore Futures Contract in
India” submitted to Institute for Technology & Management, Kharghar, Navi Mumbai for the
partial fulfillment of the degree of Post Graduate Diploma in Management, is a record of
original work done by Vinay Madaan, during the period of his /her study and was under my
guidance.
Signature:_____________________
Prof. Rakhi R. Shrivastava
Faculty Guide
Institute for Technology & Management
Kharghar, Navi Mumbai.

Table of Content
1. Company profile ………………….……………........................................... 9

1.1 Introduction …………………………………………………………….. 9
1.2 Philosophy ………………………………………………………………. 9
1.3 About Founders ………………………………………………………… 10
1.4 Flagship in Other Services ……………………………………………… 10
1.4.1 Indiabulls Insurance ….……………………………………….. 10
1.4.2 Loans ………………….………………………………………. 11
1.4.3 Real Estate ……………..……………………………………… 11
1.4.4 Indiabulls Resources Ltd. ……..………………………………. 11
1.5 Indiabulls Market Share …………………..……………………………... 12
1.6 Indian Commodity Exchange (ICEX) ……………..……………………. 14
2. Commodity Profile – Gold ………………………………….……………. 18

2.1 Importance and Uses ………………………….…………………. 18
2.2 International Scenario ………………………….………………… 19
2.2.1 World Gold Supply ………………….…………………. 20
2.2.2 World Gold Demand …………………………………… 21
2.3 World Gold Markets ……………………………………………… 23
2.4 Domestic Scenario ………………………………………………... 23
2.4.1 Major Gold Mines in India ………...…………………… 24
2.4.2 Gold Demand in India …………..……………………… 24
2.4.3 Gold Imports in India …………..………………………. 25
2.5 Gold Prices …………………………….…………………………. 25
2.5.1 Factors Influencing Gold Prices ….…………………….. 27
3. Iron Ore - Introduction ………………...…………………………………... 28

3.1 Consumption & production of Iron Ore (Economic View) ……………… 30
3.2 Seaborne and Land-shipped Trade ………………………………………. 32
3.3 Steel Projections – Demand & Supply …………………………………… 34
3.4 Iron Ore Market and Its Pricing ……………………………….…………. 35
3.4.1 OTC Clearing Benefits …………………………….…………… 38
3.5 Growth Prospects: M&A Activity ………………………….……………. 38
4. Iron Ore – Product Guide ………..………………………………………... 42

4.1 Global Iron Ore and Steel Markets …………………….…………………. 42
4.2 Iron Ore Specifications and Types ………………….…………………….. 42
4.3 Price Relationships ……………………………….……………………….. 44
4.4 Iron Ore Market Status and Evolution ………….………………………… 45
4.5 Index Evolution and Platts Physical Methodologies ……….…………….. 46
4.6 Future Index and Benchmark Scenarios: The Oil Example .……………… 47
4.7 Iron Ore and Benchmarks ……………………………….………………… 47
5. Conclusion ………………………………………………………………………. 50
6. Bibliography …………………...……………………………………………….. 52

Company Profile
“Indiabulls – ICEX”

1. Company Profile
1.1 Introduction
Indiabulls Group is one of the top business houses in the country with business interests in
Real Estate, Infrastructure, Financial Services and Power sectors. Indiabulls Group
companies are listed in Indian and overseas financial markets. The Networth of the Group
exceeds USD 3 billion. Indiabulls has been conferred the status of a “Business Superbrand”
by The Brand Council, SuperbrandsIndia.
Indiabulls Financial Services is an integrated financial services powerhouse providing

Consumer Finance, Housing Finance, Commercial Loans, Life Insurance, Asset Management
and Advisory services. Indiabulls Financial Services Ltd is amongst 68 companies
constituting MSCI - Morgan Stanley India Index. Indiabulls Financial is also part of CLSA’s
model portfolio of 30 Best Companies in Asia. Indiabulls Financial Services in partnership
with MMTC Limited, the largest commodity trading company in India, has set up India’s 4th
Multi-Commodities Exchange.
Indiabulls Real Estate Limited is India’s third largest property company with development
projects spread across residential projects, commercial offices, hotels, malls, and Special
Economic Zones (SEZs) infrastructure development. Indiabulls Real Estate partnered with
Farallon Capital Management LLC of USA to bring the first FDI into real estate. Indiabulls
Real Estate is transforming 14 million sqft in 16 cities into premium quality, high-end
commercial, residential and retail spaces. Indiabulls Real Estate has diversified significantly
in the following business verticals within the real estate space: Real Estate Development,
Project Advisory & Facilities Management: Residential, Commercial (Office and Malls)
and SEZ Development. Power: Thermal and Hydro Power Generation.
Indiabulls Securities Limited is India’s leading capital markets company with All-India
Presence and an extensive client base. Indiabulls Securities possesses state of the art trading
platform, best broking practices and is the pioneer in trading product innovations. Power
Indiabulls, in-house trading platform, is one of the fastest and most efficient trading platforms
in the country.. Indiabulls Securities Limited is the first brokerage house to be assigned the
highest rating BQ – 1 by CRISIL.
1.2 Philosophy
Indiabulls has created a unique organization that is designed for you – the Smart Investor –.
it passionately believe in the Smart Investor who wants to make his own educated investment
choices and demands world class access to a full range of services and products ranging from
Equities to Insurance, combined with the highest level of integrity, service and
professionalism.
Indiabulls is a full service investment firm offering clients access to a tremendous range of
financial services from 135 locations across 95 cities. We have a strong team of over 1000
Client Relationship Managers focused on serving customers unique needs. Our world class

infrastructure, built with tens of crores of investment, provides our clients with real-time
service, multi-channel & 24/7 access to all information and products. As we've expanded and
developed to serve the needs of all kinds of investors, we've been guided by one underlying
Philosophy: You come first.
Indiabulls 1 2 FMS-IRM
We are proud to introduce to you Indiabulls Professional NetworkTM that offers real-time
prices, equity analysis, detailed data and news, intelligent analytics, and electronic trading
capabilities, right at your finger-tips. This powerful technology is complemented by our
knowledgeable and customer focused Relationship Managers who are available to help with
your financial planning and investment needs.
1.3 About Founders

The fast paced growth, diversification and consolidation of the Group have been possible due
to the vision and leadership of the cofounders of Indiabulls.
Sameer Gehlaut is the Chairman, CEO and Whole Time Director of Indiabulls. Sameer is an
engineer from IIT, Delhi (1995) and has worked internationally with Halliburton in its
international services business in 1995. He has utilized his experience with the international
best practices and professional work culture at Halliburton to lead Indiabulls successfully.
Rajiv Rattan is the President, CFO and Whole Time Director of Indiabulls. Rajiv is an
engineer from IIT, Delhi (1994) and has rich experience in the oil industry, having worked
extensively across the globe in highly responsible assignments with Schlumberger. Rajiv has
managed remote exploration projects providing evaluation services for different clients in
India as well as abroad.
Saurabh Mittal is a Director at Indiabulls. Declared the best graduating student in IIT, Delhi
in (1995), Saurabh was also one of the engineers selected by Schlumberger to work for its
international services business in 1995 and gained experience of working in various global
locations. He graduated as a Baker Scholar with an MBA from the Harvard Business
School. He has also developed in-depth understanding of international financial markets.
1.4 Flagship in Other Services

1.4.1 Indiabulls Insurance
“When you hear the word Insurance, the words boring and mundane probably enter
your mind.”
When it comes to business, you are right up there. Taking all those split second decisions,
avoiding pitfalls and making sure your money works hard for you. But don't you think the
business of life requires just as much attention and probably even more. That's we are proud
to bring to you an offer exclusively for you. As a part of our endeavor to provide you with
world- class products and services, Indiabulls gives you the opportunity to avail of the whole

range of Birla Sunlife Insurance Products through the Indiabulls network of 1000
Relationship Managers over 135 locations nationwide. Which means you can take care of
life, while taking care of business.
As always, we put your needs first.
1.4.2 Loans
• Personal Loan
“ No questions. Only Loans.”
No matter where you work, or how much you earn, we offer you the shortest route to a loan
with minimum paperwork and procedures. With Indiabulls Fast Loans, you can avail of easy
loans for a minimum of Rs.10,000 to a maximum amount of Rs.1,00,000.
Flexible loan tenure of up to 4 years (i.e. 1 month to 48 months).
Loans available from a minimum of Rs.10, 000 up to a maximum of Rs.100,000.
Easy monthly repayment through equated monthly installments (EMI). Easy documentation
and quick disbursal
• Home Loan
Indiabulls has commenced lending of Mortgage Loans to prospective customers under the
flagship of Indiabulls Housing Finance Ltd. Here we enable home-seekers to access finance
to buy, build, rent or improve their homes. We also provide plot loans, Loan against
Residential, Commercial and Rental Property, thereby enabling the borrower to leverage the
property owned to fund any legitimate needs be it Business Expansion, Child's Education,
Child's Marriage or for holiday abroad.
1.4.3 Real Estate
Through its group companies, Indiabulls is also engaged in real estate development. The
group companies recently made winning bids for the Jupiter and Elphinstone Mills in
Mumbai in an auction carried out by the National Textiles Corporation (NTC), a Government
of India undertaking. The company will now develop modern commercial complexes in the
heart of Mumbai - the financial capital of India. Indiabulls' foreign partner, Farallon Capital
made the first real estate related FDI investment in Indiabulls Properties Pvt. Ltd to buy
Jupiter Mills immediately after the new FDI guidelines were introduced by the Government
of India for real estate development in March 2005.
1.4.4 Indiabulls Resources Ltd
Indiabulls Resources Ltd, a 100 per cent subsidiary of Indiabulls Financial Services Ltd.,
has been established with the objective of evolving as an independent oil company over time.
Our immediate short-term goal is to partner with oil companies who are willing to come to

India and bid in the current NELP-6 round. We are ready to invest along with such
companies for exploration blocks of mutual interest.
Indiabulls has grown its business by over 100% CAGR since inception. The growth of
Indiabulls in a highly competitive market is a testimony of its quality services.
1.5 Indiabulls Market Share
ABULLS SURESH ICICI INDIA SHARE KARVY MOSt

RATHI INFO. KHAN
CHARGES
Demat A/C Rs.1000/ Rs.100 Rs.750 NIL Rs.1000 Rs.300/575 Rs.300
/
Trading A/C 1750(4+5) Rs.220 (4+5) Rs.500 Rs.1000 800/5000 NIL
AMC NIL Rs.274 Rs.500 Rs.250 Rs.300 (4+5+6) NIL
BROKERAGE
Delievery Trade 50 paise 50 paise 0.4-0.85% 0.25- 50 paise 30 paise Rs.35paise
0.50%
Intra-day Trade 05 05 paise 0.2- 0.07- 06 paise 03 paise Rs.05 paise
paise(min1 0.425% 0.10%
p)
F&O Trade 05 paise 05 paise 10.1- 0.06- 08 paise 03 paise Rs.05 paise
0.15% 0.10%
EXPOSURE
Delievery Trade 2/4 times NIL NA 2 times NIL NIL 5 times(14+
Intra-day Trade 12 times 10 times 10 times 8 times NIL unlimited 15+16)
F&O Trade 75% of NA NA NA NIL NIL
cash
INITIAL AMT. NA NA Rs.5200 2500/5000 Rs.300/500 NA NA

0
DEMATERILISATION Rs.7/pc NA Rs.35+2/pc Rs.25+5/pc Rs.5/pc Rs.3/pc Rs.25/pc
REMATERILISATION NA NA Rs.20/pc RS.25+15/ Rs.35/pc Rs.30/pc Rs.35/pc

pc
SOFTWARE YES(PIB) NO interest YES(3000/ YES NO YES

7999)

Fig. 1: Market Share of Indiabulls Competitors
SHARE KHAN
7% ICICI DIRECT
17% 13%
SURESH RATHI
13%
30% INDIABULLS
20%
INDIA INFOLINE
OTHERS
The commodities futures market in India is only about 3 times the size of physical market,
whereas it is more than 10 times the size of physical market in other developed countries.
Therefore, the current state of commodities market in India leaves lot of scope for growth in
terms of depth and reach of the market as well as attracting new players who are utilizing the
services of overseas commodities market due to various reasons like lack of depth in product
category they wish to trade in; inadequate warehousing facilities at strategic locations, etc.

1.6 Indian Commodity Exchange Limited (ICEX)
ICEX is a screen based on-line derivatives exchange for commodities and has established a
reliable, time tested, and a transparent trading platform. It is also in the process of putting in
place robust assaying and warehousing facilities in order to facilitate deliveries. It is jointly
promoted by Indiabulls Financial Services Ltd and MMTC Limited, and will have Indian
Potash Ltd among others, as partners.
This exchange is ideally positioned to tap the huge scope for increasing the depth and size of
commodities' market and fill in the structural gaps existing in the Indian market. Our head
office is located in North India (Gurgaon), one of the key regions in India's Agri belt, with a
vision to encourage participation of farmers, traders and actual users to hedge their positions
against the wild price fluctuations.
Corporate Vision
• Provide fair, transparent and efficient trading platform to all participants
• Meet the international benchmarks for the Indian commodity market
• Provide equal opportunity and access to investors all over the country through the
modern communication modes
• Attract a wide array of end users, financial intermediaries and hedgers
• Become a major trading hub for most of the commodities
• To provide product portfolio to suit the trading community needs in an efficient

manner
• We will provide the widest range of benchmark future products available on any
exchange, covering all major commodities. Our collective vision is global growth,
innovative product development, continually enhanced echnology and the highest
level of service available on any exchange. We offer future trading in Agricultural
commodities, bullions, base metals, and energy.
• Our objective is to serve customers with a global product line, virtually

round-the-clock electronic trading and strategic alliances with other
leading players. We also offer a number of programs and products designed
specifically to appeal to a global audience.

Key differentiators
• Joint venture between Public/Private entities Well capitalized Rs. 100 Cr initial
capital Reputation of partners and pan India presence
• Key stake holders having rich experience in the domain viz. commodities,
warehousing, financial markets
• Professionally driven exchange with an entrepreneurial mindset
• Aim to remove discrepancy in the commodities market by building transparency in
the exchange
• Unprecedented price transparency and market depth
MMTC Ltd, a Government of India enterprise, is the largest international trading company
of India having annual turnover of more then US$ 7Billion or Rs. 36000 Crore. It is among
the leading international trading company of South Asia having experience of more then 45
years in bulk trading of diverse commodities and products. It is present in 56 locations in
India through offices, warehouses, port offices & retail outlets. It is the largest exporter of
Minerals and single largest importer / supplier or Bullion & Non-Ferrous Metals in India.
MMTC is also leading in trading of Agro products, Fertilizers, Coal & Hydrocarbons,
textiles, chemicals etc. MMTC Ltd has a fully owned subsidiary, MTPL in Singapore and
also a promoter of NINL in Orissa, an Iron & Steel plant
MMTC Limited, India’s first Super Star Trading House, continues to be the country's
leader in mineral exports for four decades now. During the last decade, MMTC could
withstand the stiff competition in the world market by its continuous and persistent
efforts in diversifying its markets, enlarging its product range, expanding extensively its
infrastructure facilities and expertise in mineral operations, and by attaching utmost care and
importance to its trade commitments as also the quality of service and products.
MMTC has been consistently striving to enhance its competitiveness in the area of value
addition. It has set up a crushing and screening plant at Banehatti in Bellary Hospet Sector
not only to source higher value realization in the international market but also to compete
with the international suppliers like Australia and Brazil in the markets like Japan and South
Korea.
MMTC has provided further fillip to value addition to minerals. The 1.1 million ton Steel
Plant consumes about 2 million tons of various types of minerals annually being supplied by
MMTC. The company has also taken an initiative to link import of capital equipments
required for modernizing mining activities in the country to promote export of minerals. The
import of the earthmoving equipments was linked to export of Iron Ore under EPCG scheme.

Items of Trade
• IRON ORE
• MANGANESE ORE
• CHROME ORE
• OTHERS
(Mud Chemicals, Barytes, Bentonite, Bauxite, Talc, Gypsum, Feldspar,
Quartz/Silica Sand, Garnet Sand, Kaolin (China Clay), Vermiculite)
Destination of Exports
MMTC exports Iron ore to Japan, South Korea, China, Middle East etc. The export is both on
the basis of long term and annual spot contracts.
Leader in Mineral Exports
MMTC's performance in mineral trade has been acknowledged by the CAPEXIL

(Chemicals and Allied Products Export Promotion Council) by conferring the nation's
highest award for excellence in mineral exports 13th time in succession.
Mode of Sales
MMTC's mineral sales are on FOB basis only.

Commodity Profile
“Gold”

2. Commodity Profile - Gold

Gold is primarily a monetary asset and partly a commodity. Gold is the world's oldest
international currency. It is an important element of global monetary reserves. Central
banks, and official international institutions, have been major holders of gold for more
than 100 years and are expected to retain large stocks in future.
Gold has maintained its purchasing power throughout its 5,000-year track record, as the
world’s only monetary metal. It is considered as a commodity as it can be acquired and
stored in the form of Jewellery, Bars, Coins and Gold Deposits. It is also called precious
metal, which means it does not rust (oxidise) at normal conditions. It is resistant against
many acids and a good electric conductor, which makes it useful for electronic circuits. It
is useful for jewellry because of its inertness.
2.1 Importance and Uses

Gold has mainly three types of uses: Jewellery Demand, Investment Demand and
Industrial uses.
• Jewellery Demand
- Jewellery consistently accounts for around three-quarters of gold demand.
In terms of retail value, the USA is the largest market for gold jewellery,
whereas India is the largest consumer in volume terms, accounting for 25%
of demand in 2007.
• Investment demand
- Investment demand in gold has increased considerably in recent years.
Since 2003, investment has representing the strongest source of growth in
demand, with an increase in value terms to the end of 2007 of around
280%.
• Industrial Demand
- Industrial and dental uses account for around 13% of gold demand (an
annual average of over 425 tonnes from 2003 to 2007 inclusive).The value
of gold is a result of its rareness and also of its interesting physical
characteristics. Pure gold is too soft for ordinary use and is typically
hardened by alloying with copper or other base metals. The gold content of
gold alloys is measured in carats (k), pure gold being designated as 24k.
Gold market is highly liquid and gold held by Central Banks, other major institutions and
retail jewellers keep coming back to the market. Due to large stocks of gold as against its
demand, it is argued that the core driver of the real price of gold is stock equilibrium
rather than flow equilibrium.
It is effective portfolio diversifier, which summarizes the usefulness of gold in terms of

modern portfolio management. Gold is effective diversifier during economic stress
periods or instability. Over 60 countries including South Africa, US, Australia and Russia

mine gold. Although gold mining industry is enjoying higher prices in recent years, they
suffer because of higher input costs. Global mining output is also declining as quality and
easily accessible ore has been mined at most of producing countries.
2.2 International Scenario

South Africa, the United States and Australia are the three largest gold producing
countries. Other major producers are Canada, China, Indonesia, and Russia. But if we
measure only the current year’s production, China has become the world’s largest
producer of gold, overtaking South Africa’s top position in 2007.
As gold has been considered as a proxy currency, its reserves are held by Governments
i.e., Central Banks/ institutions of various countries. The survey carried out in 2005
revealed that US, Germany, France, Italy, Switzerland, Netherlands, Japan, Portugal,
Spain and China were the countries where official gold holdings stood over 500 tons.
World Gold Demand & Supply
Source: GFMS
Global demand ruling higher compared with supply (including mine output and old gold
scrap) in recent years and as a result the market has witnessed price escalation. According
to World Gold Council, gold mine production has declined to 2407 tons in 2008
compared with 2486 and 2473 tons in 2006 and 2007 respectively. The total gold supply
including old gold scrap has been declining and stood at 3468 tonnes in 2008 as compared
to previous year’s gold supply of 3488 tonnes.

2.2.1 World Gold Supply
• Mine production
Gold is produced from mines on every continent except Antarctica, where mining is
forbidden. According to data of year 2007, there are around 400 operating gold mines
worldwide. Depending on the geologic situation, the mining is very different. However,
the overall level of global mine production is relatively stable, averaging approximately
2,525 tonnes per year over the last five years.
The most important gold producer of the world is South Africa. The mines in South
Africa can provide several superlatives. The Kruger Rand gold coins are world famous.
The East Rand Mine is the world's deepest mine, 3585 m below surface. The Free Gold
Mine was the world's most productive gold mine with the output of 115 tons per year.
Driefontein Consolidated Mine has produced more gold than any other gold mine, about
2292 tons. Deepest single-drop mining shaft in the world has been sunk at South Deep
Gold Mine.
• Scrap
However, although gold mine production is relatively inelastic, recycled gold (or scrap)
ensures there is easily traded supply when needed, and this helps to stabilise the gold
price. Between 2003 and 2007, recycled gold contributed an average 26% to annual
supply flows.
• Central Banks
Central banks and supranational organisations (such as the International Monetary Fund)
currently hold gold as reserve assets amounting to around 29,000 tonnes, dispersed across
110 organisations. On average, governments hold around 10% of their official reserves as
gold. However, the proportion varies country-by-country. Although a number of central
banks have increased their gold reserves in the past decade, the sector as a whole has been
a net seller since 1989, contributing an average of 520 tonnes to annual supply flows in
2003-2007. Net central bank sales amounted to just 486 tonnes in 2007 and it decreased to
279 tonnes in 2008.

Major Gold Producing Countries
Fig. 2: Major Gold Producing Countries’ Share
China, United States, South Africa and Australia were the major producers of gold in
2008. These countries contributed over 40% of the total global mine production.
2.2.2 World Gold Demand
Demand for gold is widely spread around the world. East Asia, the Indian sub-continent
and the Middle East accounted for 72% of world demand in 2007. 55% of demand is
attributable to just five countries - India, Italy, Turkey, USA and China. Gold demand
mainly comes from Jewellery consumption, Industrial and investment uses.
• Jewellery Demand
Jewellery consistently accounts for around three-quarters of gold demand. In the 12

months to December 2007, this amounted to US$54 billion, making jewellery one of the
world's largest categories of consumer goods. In terms of retail value, the USA is the
largest market for gold jewellery, whereas India is the largest consumer in volume terms,
accounting for 25% of demand in 2007.

• Investment Demand
Investment demand in gold has increased considerably in recent years. Since 2003,
investment has representing the strongest source of growth in demand, with an increase in
value terms to the end of 2007 of around 280%. Investment attracted net inflows of
approximately $15bn in 2007.
• Industrial Demand
Industrial and dental uses account for around 13% of gold demand (an annual average of
over 425 tonnes from 2003 to 2007 inclusive).
Identifiable Gold Demand (in tonnes)
Source: www.gold.org
East Asia, the Indian sub-continent and the Middle East accounted for 72% of world
demand in 2007. 55% of demand is attributable to just five countries - India, Italy,
Turkey, USA and China. India is the world’s largest gold consumer, followed by China.
Demand for gold, including jewellery, industrial, and investment demand has broadened
in recent years. In China, which has overtaken the US as the second largest retail market,
jewellery demand ruled strong in 2007. In 2007, the total demand has overtaken the total
supply.

2.3 World Gold Markets

London: London Bullion Market Association (LBMA). It is world’s biggest market major
clearinghouse of gold. New York: New York Mercantile Exchange Commex Division
(NYMEX) begins trading on 31st December 1974. It is mainly considered as “home of
futures trading” Zurich: It is also one of the major spot and future market in Europe
mainly known as a “Physical Turntable”.
Istanbul: Istanbul Gold Exchange begins trading on 26th July 1995. Major gold spot and
futures market are in Turkey and Middle East.
Dubai: Dubai Gold & Commodities Exchange (DGCX) begins trading in June 2005,
Major spot gold market for Saudi and gulf countries. It is also one of the famous jewellers
market.
Singapore: It is doorway to South East Asian consuming countries major spot and future
market.
Hong Kong: It is doorway to China, now one of the major gold consuming countries in
the world.
Tokyo: Tokyo Commodities Exchange (TOCOM) begins trading on 23rd March 1982,
major spot and future market in Japan.
Shanghai: began trading on 26 July 1995. It is one of the major future centers in the
China.
Turkey has become an important net exporter.
Vietnam, usually a large buyer; and Thailand are also exporting gold now.
• Units of weight
Around the world, bars can be denominated or traded in different units of weight to
accommodate the preferences of regions or countries. The most prominent units are the
gram (international), troy ounce (US, UK and Australia), tola (Indian subcontinent and
Middle East), tael (Hon Kong and Taiwan), baht (Thailand) and chi (Viet Nam).
2.4 Domestic Scenario

India is arguably the largest bullion market in the world. It has been until now, the
undisputed single-largest Gold bullion consumer, with its own final demand outweighing
the next largest market – China by almost 57 percent. But it seems now, that the Chinese
Gold buyers have caught up during 2008 as Chinese demand is surging rapidly (up by 15
percent year-on-year). Indian demand fell as Indian Gold sales collapsed by about 65
percent in the year 2008. In spite of being the largest consumer of gold, India plays no

major role globally in influencing this precious metal's pricing, output or quality issues.
India’s total gold holdings are between 10,000 tonnes and 15,000 tonnes of which the
Reserve Bank of India has only around 400 tonnes. India has the largest number of gold
Jewellery shops in the world.
2.4.1 Major Gold Mines in India
There is a huge mismatch between demand and primary supply in India, the balance being
made up by imports. The only major gold mine currently in production is the Hutti mine,
owned by Hutti Gold Mines Company Limited, which produces around 3 tons of gold a
year. Hindustan Copper also produces some gold as a by-product.
Gold Production in India
Production in recent years (in tons)
Source: www.pib.nic.in
*p - provisional
As given in the above table, gold production in India is ruling lower in recent years.
Karnataka was the leading producer of this precious metal with the output ranging from 2
to 3 tons per annum during 2005-06 and 2007-08. Jharkhand also produces small quantity
of gold.
2.4.2 Gold Demand in India
Gold, the ultimate safe haven in troubled times, remained the hot commodity throughout
the year. It scaled new heights in the global markets and in India, which is the largest
buyer of the metal.

Gold Demand in India vs World (Tonnes)
Source: GFMS
* provisional
Indian demand for Gold accounts for on an avg. 25% share of world gold demand. In
2008, demand for gold has decreased in India because of high price amid global financial
crisis.
2.4.3 Gold Imports in India
India imports around 500-800 tonnes of gold on an average every year. In 2008, India’s
gold imports dipped by 45 per cent to touch 450 tons. However, buying of gold Jewellery
has fallen sharply in January, February & March month of the year 2009, leading to a
slump in the yellow metal’s imports.
2.5 Gold Prices

There are many factors, which affect the gold prices in domestic as well as international
market. However, it is highly correlated with the US dollar, the world's main trading
currency. Gold has long been regarded by investors as a good protection against
depreciation in a currency's value, both internally (i.e. against inflation) and externally
(against other currencies). Gold is widely considered to be a particularly effective hedge
against fluctuations in the US dollar, the world's main trading currency.

Fig. 3: Gold Price vs Dollar Movement
The gold price has been found to be negatively correlated with the US dollar and this
relationship appeared to be consistent over time. It is a consistently good protection
against the economic instability and the exchange rate fluctuations.
Fig. 4: Gold Prices in Domestic & International Market
Note: Average price from Jan to Aug for 2009

Gold prices are skyrocketing over the years both in the national and international markets.
However, the price increase in the national market was significant during the current year
as average price (till end of Aug ’09) ruled at about Rs.14,600 per 10 grams compared
with the annual average of Rs.12,670 per 10 grams in 2008. With this, the market has
witnessed price appreciation of about 15% compared with merely 5% international market
for the same period, which could be mainly linked to the currency factor.
2.5.1 Factors influencing Gold Prices
World macro economic factors including US Dollar, interest rate and so on, Global gold
mine production, Demand by Central banks, Domestic demand, which is linked to
agricultural prosperity and festivals/marriages etc, Producer / miner hedging interest,
Comparative returns on stock markets, US dollar movement against other currencies,
Indian rupee movement against the US dollar, Geopolitical tensions, Global economic
situation.

Project
“Feasibility Study of Iron Ore Futures Contract in India”

3. Iron Ore - Introduction

Iron ore, mainly hematite (Fe2O3) as a primary source of iron, is a raw material used to
make Pig Iron, which is one of the main raw materials to make steel. 98% of the mined
iron ore is used to make steel. Indeed, it has been argued that iron ore is “more integral to
the global economy than any other commodity, except perhaps oil”.
However, in some situations, more inferior iron ore sources have been used by
industrialized societies when access to high-grade hematite ore was not available. There
are four main types of iron ore deposits worked currently, depending on the mineralogy
and geology of the ore deposits. These are magnetite, titan magnetite, massive hematite
and pisolitic ironstone deposits.
Branded iron deposits or branded iron formations are metamorphosed sedimentary

rocks composed predominantly of thinly bedded iron minerals and silica (as quartz). The
typical grade of iron at which a magnetite-bearing banded iron formation becomes
economic is roughly 25% Fe, which can generally yield a 33% to 40% recovery of
magnetite by weight, to produce a concentrate grading in excess of 64% Fe by weight.
Currently magnetite iron ore is mined in Minnesota and Michigan in the U.S., and Eastern
Canada mine taconite. Magnetite bearing BIF is currently mined extensively in Brazil,
which exports significant quantities to Asia, and there is a nascent and large magnetite
iron ore industry in Australia.
Another, minor, source of iron ores are magmatic accumulations in layered intrusions
which contain a typically titanium-bearing magnetite often with vanadium. These ores
form a niche market, with specialty smelters used to recover the iron, titanium and
vanadium. These ores are beneficiated essentially similar to banded iron formation ores,
but usually are more easily upgraded via crushing and screening.
Hematite iron ore deposits are currently exploited on all continents, with the largest
intensity in South America, Australia and Asia. Hematite iron is typically rarer than
magnetite bearing BIF or other rocks which form its main source, but it is considerably
cheaper to process as it generally does not require beneficiation due to its higher iron
content. Export grade Hematite ores are generally in the 62–64% Fe range.

3.1 Consumption & production of Iron Ore (Economic View)

Iron is the world's most commonly used metal - steel, of which iron ore is the key
ingredient, represents almost 95% of all metal used per year. It is used primarily in
structural engineering applications and in maritime purposes, automobiles, and general
industrial applications (machinery).
Iron-rich rocks are common worldwide, but ore-grade commercial mining operations are
dominated by the countries listed in the table below –
Mine Production Reserves

2,008 2,009 Crude ore Iron content
China 824 900 22,000 7,200
Brazil 355 380 16,000 8,900
Australia 342 370 20,000 13,000
India 220 260 7,000 4,500
Russia 100 85 25,000 14,000
Ukraine 73 56 30,000 9,000
United States 54 26 6,900 2,100
South Africa 49 53 1,000 650
Other countries 47 47 11,000 6,200
Iran 32 33 2,500 1,400
Canada 31 27 1,700 1,100
Sweden 24 18 3,500 2,200
Kazakhstan 23 21 8,300 3,300
Venezuela 21 16 4,000 2,400
Mexico 12 12 700 400
Mauritania 11 11 700 400
World Total
(rounded) 2,220 2,300 1,60,000 77,000
*Estimated iron ore production in million metric tons for 2008 & 2009 according to U.S.
Geological Survey
The major constraint to economics for iron ore deposits is not necessarily the grade or
size of the deposits; because it is not particularly hard to geologically prove enough
tonnage of the rocks exist. The main constraint is the position of the iron ore relative to
market, the cost of rail infrastructure to get it to market and the energy cost required to do
so.
Mining iron ore is a high volume low margin business, as the value of iron is significantly
lower than base metals. It is highly capital intensive, and requires significant investment
in infrastructure such as rail in order to transport the ore from the mine to a freight ship.
For these reasons, iron ore production is concentrated in the hands a few major players.
According to the table above, the 2008 & 2009 world average production level of raw
iron amounts to 2.2 billion metric tons and 2.3 billion metric tons, respectively. It is
expected that in the next few years, import volume of major iron ore importers will rise,
and the total import volume will show a slight upward trend with an increase of over 5%.
However, China’s import growth will be stable, not very possible to break 500 million

tons. Australia and Brazil dominate the seaborne trade, with 72% of the market. BHP, Rio
and Vale control 66% of this market between them.
The total recoverable reserves of iron ore in India are about 9,602 million tones of
hematite and 3,408 million tones of magnetite. Madhya Pradesh, Karnataka, Bihar,
Orissa, Goa, Maharashtra, Andhra Pradesh, Kerala, Rajasthan and Tamil Nadu are
the principal Indian producers of iron ore.
Controlling Country Controlled Share of total

entity production (Mt) world
production (%)
Cia Vale Do Rio Brazil 303 17.3
Doce
Rio Tinto plc UK 150 8.6
BHP Billiton Ltd Australia 137 7.8
State of India India 54 (estimated) 3.1
Arcelor Mittal UK 46 (estimated) 2.6
Metalloinvest Russia 38 (estimated) 2.2
Anglo American South Africa 36.7 2.1
Cliffs Natural USA 32.7 1.9
Resources
System Capital Ukraine 24.5 1.4
Management
LKAB (State of Sweden 23.9 1.4
Sweden)
Total 10 largest 846 48.4
Total world 1746 100
Notes: State of India includes SAIL and NMDC.
Source: Raw Materials Data, Stockholm 2009
World consumption of iron ore grows 10% per annum on average with the main
consumers being China, Japan, Korea, the United States and the European Union.
China is currently the largest consumer of iron ore, which translates to be the world's
largest steel producing country. It is also the largest importer, buying 52% of the seaborne
trade in iron ore in 2004. China is followed by Japan and Korea, which consume a
significant amount of raw iron ore and metallurgical coal. In 2006, China produced 588
million tons of iron ore, with an annual growth of 38%.
It is hard to assume the recovery time of iron ore demand in 2009, which to a large extent
lies on the consumption rate of Chinese port stock as well as China’s domestic iron
mining and utilization.
It is also believed that another major factor should not be ignored is global crude steel
productivity and it is estimated that the global crude steel production growth rate will

decline.
Iron ore reserves at present seem quite vast, but some are starting to suggest that the
maths of continual exponential increase in consumption can even make this resource seem
quite finite. For instance, Lester Brown of the Worldwatch Institute has suggested iron
ore could run out within 64 years based on an extremely conservative extrapolation of 2%
growth per year.
3.2 Seaborne and Land-shipped Trade

International iron ore trade reached record levels at 512 million tonnes (Mt) in 2002. Iron
ore miners around the world see a silver lining after some difficult years. Price
negotiations in 2003 were, if possible, even tougher and more protracted than in 2002 –
but they resulted in a 9 per cent price increase on average.
The unbelievably strong developments in the Chinese steel industry have set the pace
globally. Steel production in China was 182 Mt in 2002, a double digit increase for the
second consecutive year. In the first 5 months of 2003 the growth rate is as high. Total
global crude steel production in 2002 was 902 Mt – a 6.2 % increase over 2001 indicating
a healthy trend also in other parts of the world.
But there are also some dark clouds on the rosy morning sky. Medium and small iron ore
producers, particularly those who have been hit by the weakening US dollar are facing
difficult years.
The iron ore industry has been consolidating rapidly in recent years. A triumvirate has
developed consisting of Brazilian Companhia Vale do Rio Doce (CVRD) and British/
Australian giants, BHP Billiton and Rio Tinto. Together these three companies control
over 30 % of world production and, more importantly, over 70 % of world seaborne trade.
There is a danger that the producers behind the top troika will become marginalised price
takers, without much influence on future developments. The danger that the strong
oligopolistic structure of the iron ore sector will influence prices should not be neglected
either.
To measure corporate control at the mine stage underestimates the concentration of iron
ore producers since many mines are captive with a protected market. The share of
seaborne trade is an alternative method of assessing market power. CVRD alone controls
over 34 % of the total world market for seaborne iron ore and the three largest companies
control 70 %. This illustrates more clearly the potential influence over prices by the major
producers.
Falling steel demand is butting up against iron ore production capacity growth and current
under-utilization. Also, in terms of seaborne trade volume, despite the potential for
smaller high-cost-basis mines in China to shutdown (increasing the need for imported
ore), seaborne iron ore trade is indeed expected to decline along with lower global,
and particularly Chinese, steel demand. Clarkson sees seaborne trade volumes falling

back to 2007 levels, as shown below.
Fig. 5: Seaborne Trade in Iron Ore, 2000-2009, Mt, (projected 2009)
Source: Clarkson, Dry Bulk Trade Outlook, May 2009
For iron ore in general (seaborne or land-shipped), one particular UNCTAD chart really
captured the problem ore pricing faces over the next few years, shown below. Essentially,
new ore production capacity additions will outstrip new demand by a wide margin. While
the demand estimate they use might be a bit too conservative, particularly if Chinese
demand rebounds well say in late 2010, the supply/demand gap is large enough to
accommodate even a pretty substantial upside surprise in terms of steel demand for 2009 -
2011. Nevertheless, one feasible way to close this gap would be if a sizeable amount of
Chinese ore production shut down due to high costs, and do so very rapidly, faster than
UNCTAD has put in their numbers.

Fig. 6: Supply – Demand Balance 2009-2011(Mt/y)
3.3 Steel Projections – Demand & Supply

UNCTAD recently released report forecasting a 15% decline in global steel demand,
which comes after a 1.4% decline in 2008. While most of the world is expected to
experience sharp declines in demand, even China is expected to see a 5% decline, though
in 1Q09 China still eked out 0.8% of demand growth.

Fig. 7: World Crude Steel Production
Source: World Steel Association
The global contraction in demand has resulted in extremely low May 2009 capacity
utilization levels of 43%, 49%, and 55% for the steel industries in the US, Europe, and
Japan. Again, even China, despite its growth, was recently about 78% utilization as per
the UNCTAD piece, and via other sources is expected to see capacity utilization in
the 70% range this year due to over expansion of steel capacity.
The UNCTAD report implies that most of the 5% decline in Chinese demand should be
weighted towards the second half of 2009. The worst is yet to come from China in
terms of steel demand, and keep in mind UNCTAD takes note of Chinese government
stimulus plans.
3.4 Iron Ore Market and its Pricing

Over the last 40 years, iron ore prices have been set by a so-called benchmark system,
between miners and steelmakers. Traditionally, the first deal reached between these two
groups set a benchmark to be followed by the rest of the industry. Thus, a single price
would be negotiated once per year. A spot market also exists however it has traditionally
been much smaller. The problem with this system is that when spot prices are higher than

the benchmark, miners lose the extra revenue which would have been earned by selling
ore on the spot market. When spot prices are lower than the benchmark, some steel mills
cheat, purchasing their ore from the spot market. In other words, the benchmark system
provides protection for the steel mills, but not the miners. On the other hand, the
benchmark system offers price stability to miners and steel mills, allowing them to plan
their production more effectively.
In recent years, the benchmark system has begun to break down, with some miners
pushing for their customers to use the spot market, and negotiations with the largest
buyer, China, causing friction. As the spot market has grown in size and importance,
financial hedging instruments such as iron ore swaps have emerged. Given that most other
bulk commodities (such as coal) have evolved to a market based pricing system, it is a
fair bet that iron ore will also follow this path in the medium to long term. However, in
some cases, the cost of shipping is greater than the value of the ore. This is of particular
relevance to Brazilian iron ore, which needs to travel much further to reach China than
Australian iron ore. For this reason, Australian producers have in the past argued for a
premium on their ore, due to the fact that it is vastly cheaper to ship.
A new global growth pattern produced a major change in the dynamics of the iron ore
market.
The new iron ore pricing system which involves a decision to move existing iron ore
contracts to index-based prices, smoothes the natural daily spot price volatility as it
establishes a quarterly iron ore price based on a three-month average of price indices for
the period ending one month before the onset of the new quarter. While retaining
flexibility, the system allows steel companies to be known beforehand the price to be paid
in the following quarter, thus facilitating cost control and inventory management.
Consistent with the requirements of a modern economy, the price system minimizes the
cost of price discovery, eliminating one important source of inefficiency.
The new pricing system has several major advantages over the annual price negotiations.
It produces significant efficiency gains, saving costs and providing the right stimulus to
investment, brings flexibility with cost predictability, and enhances transparency.
It will be mutually beneficial to steel and mining companies, boosting their contribution
to global economic and social prosperity.
For over 40 years, representatives of the world’s largest mining companies have held
“closed door” talks to establish an annual “benchmark price” for delivery contracts with
the big steel producers.
During the past year this pricing system has been challenged. China, the world’s largest
importer of Iron Ore, did not accept the benchmark prices agreed between the producers
and Japan in 2009, choosing instead to purchase ore in the open spot market.

Close to 60% of all iron ore is now transacted in the spot market. The threat to the
traditional pricing system has greatly boosted the importance of the spot market and
hybrid contracts.
Iron ore swaps are becoming a more usual feature of the price picture.
Key issues for growth are:
• Education
• Confidence in Index pricing
• Access to cash collateral
A move away from the annual benchmark prices will lead to more volatile prices for steel
and other goods that require such steel. This impacts ship building, car manufactures and
household goods suppliers. We expect to see a substantial impact on the bottom line of
miners and steel mills alike Risk management tools are becoming more in demand and
educational programs sprout
Since the Mid 1990s China has emerged as the main player in the iron ore market,
replacing the traditional key importers such as Japan and South Korea. China now buys
over 70% of all seaborne iron ore - more than 700 million MT per year. Iron Ore is of key
importance to the shipping industry – often pushing down FOB prices even as CIF prices
are rising. Use of iron ore swaps growing steadily. First Asian dominated OTC
commodity market.
Fig. 8: Relationship Between Iron Ore Swaps and Steel Swaps

3.4.1 OTC Clearing Benefits
• Reduced counterparty credit risk.

• Risk borne by clearing member and clearing house.
• Increased trading opportunities.
• Eliminating need to evaluate credit risk of each potential counterparty gives
participants greater access to more prices.
• More efficient use of capital.
• Frees up bilateral credit lines for non-cleared trades.
• Maintains anonymity.
• Unlike bilateral trades, original counterparties remain anonymous from trade to
delivery.
• Multilateral netting.
• Capital efficiency across multi-market (OTC/futures) positions through cross
margining.
• Streamlined front and back office operations.
• Available straight through processing and post trade management ensures trades are
automatically confirmed and routed to back office departments and risk management
systems.
• Increased market transparency.
• Daily mark to market.
3.5 Growth Prospects: M&A Activity

As the global economy begins to recover, deal making might offer the leverage metals
companies need to push ahead of the competition. It will be the companies with strong
balance sheets and robust cash reserves that are in the best position for strategic merger
and acquisition opportunities.
In the context of a recovering economy, increasing demand and a more productive steel
industry, merger and acquisition (M&A) activity is a given. The Central Asia/Asia-Pacific
region remains a major focus for deal activity, with China now the leading acquirer.
China’s leadership recognizes that the domestic metals industry is still characterized by
the prevalence of old, inefficient companies run by individual, provincial governments.
The national government is, therefore, encouraging consolidation of these companies as a
way to both increase efficiency and help meet China’s huge demand for steel products.
In 2009, China imported 627.8 million tons of iron ore, raising the country’s reliance on
imported ore to 63.9 percent of its needs. To help alleviate that dependency, Chinese
companies are looking overseas for acquisitions that will ensure a more reliable supply of
raw materials.
As an example, Chinese industry leaders such as Wuhan Iron & Steel and Shanghai

Baosteel Group have acquired or made significant investments in Australian companies
producing iron and coal. In Brazil, the East China Mineral Exploration and Development
Bureau has agreed to buy the Itaminas iron ore mine from its owner, Bernardo de Mello.
To make the right deal, metals companies must consider how two years of economic
contraction have altered the balance of supply and demand within the value chain, as well
as how it has significantly changed and elevated the importance of due diligence.
Healthcare, climate change, commodity prices, pension plan structures, changing tax
laws, company culture and the role of human resources must be factored into today's due
diligence process.
Fig. 9: Global M&A Activity by Geographical Region
Source: Thomson SDC
Two mega deals fueled by a quest for iron ore by Chinese companies-were announced
during the first quarter of this year. Both of these deals involve iron ore, as well as
Chinese acquirers.
The largest deal announced in the first quarter was Chinalco’s $1.35 billion minority stake
transaction in Rio Tinto’s Simandou (Guinea) iron ore joint venture.
The second mega deal announced in the first quarter is the $1.22 billion East China
Mineral Exploration & Development Bureau acquisition of Brazilian iron ore miner
Itaminas Comercio de Minerios, which is estimated to have 1.3 billion metric tons of iron
ore reserves.
Signs of recovery appeared in the metals sector during the first quarter of this year as 21
deals were announced with a total combined value of $5.9 billion.

Globally the relative sense of urgency to engage in new deals is likely greatest for steel
companies, which face a consolidated basis of iron ore suppliers. This could lead to
additional horizontal mergers among steel constituents or backward integration.
Looking forward in 2010, the sector’s M&A flow will likely continue to grow.
Source: PwC Report

Iron Ore – Product Guide

4. Iron Ore – Product Guide

Fig. 10: Platts Iron Ore and Dated Brent Crude Price Assessments
4.1 Global Iron Ore and Steel Markets

Iron ore is the primary raw material used in the production of steel and — combined with
steel — constitutes the world’s second largest commodity bloc by value, after crude oil. At
least 800 million tonnes of iron ore are produced annually, whilst production of finished steel
probably accounts for about 1.1 billion tonnes of production a year, emphasizing the scale of
these closely-linked markets.
4.2 Iron Ore Specifications and Types

Iron ore is categorized by dint of where it is produced and priced, and by its ferrous content,
expressed as a percentage.
The largest producing countries are Australia, Brazil, India, South Africa and China. Major
consuming countries include China — with approximately 60% of global steel production in
2009/10 — Japan and Korea, as well as most developed and developing countries.
The 62% ferrous content grade has attracted liquidity in swaps, but a large spectrum of iron
ore fines are produced and mined from as low as 30% for some of the lower-quality Chinese

material to above 60% at the high end. The most merchantable grades lie between 58% and
65%, with key markers at 58%, 62%, 63.5% and 65%. There is a degree of correlation
between prices in the 58% to 65% range, but the most linear pricing and consuming
relationships lies between 60% and 63.5% ferrous content.
Fig. 11: Seaborne Iron Ore Demand (Mt)
Source: BP Billiton Estimates
A simple way to look at iron ore is that it starts as fines (heavy grains, like sand), is turned
into pig iron, which in combination with coking (metallurgical) coal, and energy can then
produce crude (liquid) steel, which is finished (rolled) into either in long (e.g. Rebar) or flat
(Hot Rolled Coil) form. Steel comes in many hundreds of specifications depending upon the
requirements for the finished product. It is an alloy, or a combination of metals whereas iron
ore is a mineral.

Fig. 12: Global Iron Ore End Markets Based On Iron Content, 2009E
Source: Mineral Information Institute, International Iron and Steel Institute, Barclays Equity
Capital Research
4.3 Price Relationships

Iron ore’s relationship with steel prices, with energy — Coal especially — and freight which
transports it, is obvious. The relationship between the most important global crude oil
benchmark and iron ore may not be the first to come to mind, but as a host to the two leading
crude oil benchmarks, the logic of ICE’s entry into iron ore is underscored in the following
chart:
Fig. 13 & 14: Platts Iron Ore and Dated Brent Crude Price Assessments

More directly, relational pricing can exist between iron ore and steel (known as the “metal
spread”) and iron lump to steel (the “hot metal spread”). These ‘lumps’ are the intermediate
stage between iron ore and pig iron.
Source: Platts
4.4 Iron Ore Market Status and Evolution

Historically, iron ore has traded under long-term contracts based on a benchmark price,
negotiated annually. This approach was established under the first major agreement between
a buy-side consumer of iron ore - a steel producer - and a sell-side iron ore producer - a
mining company. Historically, in an environment of generally lower and less volatile prices,
that agreement was then considered to have set prices for the remainder of the year, which
was typically based on the Japanese fiscal years of March 31st to April 1st.
However the markets have seen great structural and behavioral changes in recent years, both
the consolidation and increasing vertical integration of steel producers and combined iron ore
and steel producing entities, aligned with higher volatilities in price than was generally the
case in former years.
Benchmark negotiations between major iron ore producers in Australia, India and Brazil
especially, and consuming entities in Japan formerly, but more recently dominated by China
had already become more protracted, but over the 2007-2009 period the strains in the former
system have become intense. The volatility of more directly and short-term market-driven
input prices such as coal, energy and freight, together with the operational and financial
pressures generally in markets in these years have brought the need for shorter-term
consensus, market-based pricing more sharply into relief in iron and steel markets. Corporate
restructuring and consolidation itself has not been enough to remove the consequent
winner/loser cycle where high start up costs are required to enter such markets.

The benchmark iron ore price has become increasingly unworkable for a proportion of the
market, either so high relative to the input costs that consumers have felt justified in walking
away from contracts agreed under conditions that look very different in hindsight under
varying market conditions, or so low that producers struggled to see how revenue could cover
their costs which rose irrespective of benchmark prices for revenue stream agreed before
those input prices had risen. In short, revenue and cost pricing cycles had moved
significantly, impacting contract stability for those longer-term prices.
Faced with such developments, market participants have turned increasingly to the release of
spot iron ore material, preferring to seek out prices that are more relevant to fast moving price
fundamentals than those that existed at the time of the most recent benchmark-negotiated
price. The emergence of price assessors such as Platts in iron ore and steel markets gives such
participants an independent and transparent price for shorter-term basis pricing in iron ore, as
a market-based solution to the benchmark issue.
This is not the first time a market has seen such a development. The oil markets saw similar
developments in the 1970’s as new spot markets emerged to challenge existing long-lasting
but inflexible practices which had become increasingly unworkable and unsustainable.
Forward or derivative markets, increased forward and spot price transparency, independent
index price agency providers and the emergence and growth of a number of new spot markets
were all part of those complementary processes in oil as traded volumes grew.
Until the emergence of such swaps as the ICE iron ore swap, and for the above reasons, iron
ore has been effectively the world’s largest commodity without a derivatives market. The ICE
iron ore swap contract is the world’s first cleared iron ore contract against Platts index
methodology.
4.5 Index Evolution and Platts Physical Methodologies

Platts has been assessing prices in the metals markets for more than 35 years, drawing on the
tradition of its parent company, The McGraw-Hill Companies, which has covered the metals
markets for over 75 years. Platts saw the fast-paced evolution of iron ore from an annual to
spot market and was the first publisher to begin assessing pricing on a daily basis in June
2008. Since then, Platts has rapidly expanded its offerings for the iron ore market, which now
include flat price assessments for 62% Fe and 63.5/63% Fe grades, high-grade 65% and a
low-grade 58% Fe grade, as well as a daily 1% per Fe content differential for iron ore fines
60-63.5% to help clarify the normalization process. Platts also publishes daily freight
netbacks based on the most liquid routes to five basis origins. A forward curve assessing the
daily bid/offer and trade values in the over the counter swaps market for iron ore has also
been recently introduced.

4.6 Future Index and Benchmark Scenarios: The Oil Example
We’ve already seen a few hints that iron ore might be looking a little similar in structure to
the evolving oil markets of the late 1970’s/early 1980’s. The hot metal spread is similar in
concept to oil ‘crack spreads’ in the sense that they represent a pricing and processing
differential between a raw and a finished product. Many integrated producers are more
concerned with processing margin than flat price inputs in themselves. That is very similar to
conditions in oil pricing and markets.
HOW DID MODERN CRUDE OIL MARKETS EVOLVE?
Fig. 15
4.7 Iron Ore and Benchmarks

If iron ore follows a similar path to other commodity (and energy) markets, the 62% Fe grade
may become an important benchmark for relational pricing of other iron ore grades or even of
finished products that relate to it.
If that is the case, 58% and 65% iron ore may trade at negative and positive differential
respectively to 62%, and steel may trade as a positive differential to it in time.
What exactly is a Benchmark, and how do they function?
• Benchmarks provide a standard industry reference point which is fair, market related,
transparent and understood by all participants

• Benchmarks facilitate business by providing a focal point for differential pricing of related
commodities
• Benchmarks enable:
o Hedging - offsetting a price exposure with an equal and opposite exposure)

o Price transparency - discovery/dissemination of prices in real-time

Conclusion

5. Conclusion
Iron ore and steel markets represent a natural extension and complement to its existing
commodity and energy markets and communities of market participants. Iron ore is becoming
increasingly controlled by only a few players (Vale, Rio-Tinto/BHP). Despite recently higher
ore prices amid contract negotiations, it wouldn't be too bullish on iron ore over a 2-year
horizon even if major players can use their high market share positions to support pricing a
little bit.
BHP is keen to kill off the traditional annual price negotiations and replace them with
contracts based on price indexes. Vale also discussed its decision to move existing iron ore
contracts to index-based prices.
A new global growth pattern produced a major change in the dynamics of the iron ore
market.
The new iron ore pricing system which involves a decision to move existing iron ore
contracts to index-based prices, smoothes the natural daily spot price volatility as it
establishes a quarterly iron ore price based on a three-month average of price indices for the
period ending one month before the onset of the new quarter. While retaining flexibility, the
system allows steel companies to be known beforehand the price to be paid in the following
quarter, thus facilitating cost control and inventory management.
It will be mutually beneficial to steel and mining companies, boosting their contribution to
global economic and social prosperity.

Bibliography

6. Bibliography
https://www.theice.com/ (Intercontinental Exchange)
http://www.usgs.gov/ (U.S. Geological Survey)
http://www.ferroalloynet.com/
http://www.portal.gsi.gov.in/ (Geological Survey of India)
http://www.gfms.co.uk/ (Gold Fields Mineral Services)
http://www.gold.org/ (World Gold Council)
http://www.imf.org/ (International Monetary Fund)
http://www.unctad.org/ (United Nations Conference on Trade and Development)
http://www.icexindia.com/ (Indian Commodity Exchange)

Feasibility Study of Iron Ore Futures Contract

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Summer Internship Report

In partial fulfillment of Post Graduate Diploma in Management

Company Guide Faculty Guide

ITM Business School, Navi Mumbai, Kharghar Page 1

ITM Business School, Navi Mumbai, Kharghar Page 2

ITM Business School, Navi Mumbai

ITM Business School, Navi Mumbai, Kharghar Page 3

ITM Business School, Navi Mumbai, Kharghar Page 4

Prof. Rakhi R. Shrivastava

Institute for Technology & Management

Kharghar, Navi Mumbai.

ITM Business School, Navi Mumbai, Kharghar Page 5

1. Company profile ………………….……………........................................... 9

1.2 Philosophy ………………………………………………………………. 9

1.3 About Founders ………………………………………………………… 10

1.4 Flagship in Other Services ……………………………………………… 10

1.4.1 Indiabulls Insurance ….……………………………………….. 10

1.4.2 Loans ………………….………………………………………. 11

1.4.3 Real Estate ……………..……………………………………… 11

1.4.4 Indiabulls Resources Ltd. ……..………………………………. 11

1.5 Indiabulls Market Share …………………..……………………………... 12

1.6 Indian Commodity Exchange (ICEX) ……………..……………………. 14

2. Commodity Profile – Gold ………………………………….……………. 18

2.2 International Scenario ………………………….………………… 19

2.2.1 World Gold Supply ………………….…………………. 20

2.2.2 World Gold Demand …………………………………… 21

2.3 World Gold Markets ……………………………………………… 23

2.4 Domestic Scenario ………………………………………………... 23

2.4.1 Major Gold Mines in India ………...…………………… 24

2.4.2 Gold Demand in India …………..……………………… 24

2.4.3 Gold Imports in India …………..………………………. 25

2.5 Gold Prices …………………………….…………………………. 25

2.5.1 Factors Influencing Gold Prices ….…………………….. 27

3. Iron Ore - Introduction ………………...…………………………………... 28

ITM Business School, Navi Mumbai, Kharghar Page 6

3.2 Seaborne and Land-shipped Trade ………………………………………. 32

3.3 Steel Projections – Demand & Supply …………………………………… 34

3.4 Iron Ore Market and Its Pricing ……………………………….…………. 35

3.4.1 OTC Clearing Benefits …………………………….…………… 38

3.5 Growth Prospects: M&A Activity ………………………….……………. 38

4. Iron Ore – Product Guide ………..………………………………………... 42

4.2 Iron Ore Specifications and Types ………………….…………………….. 42

4.3 Price Relationships ……………………………….……………………….. 44

4.4 Iron Ore Market Status and Evolution ………….………………………… 45

4.5 Index Evolution and Platts Physical Methodologies ……….…………….. 46

4.7 Iron Ore and Benchmarks ……………………………….………………… 47

ITM Business School, Navi Mumbai, Kharghar Page 7

ITM Business School, Navi Mumbai, Kharghar Page 8

Indiabulls Financial Services is an integrated financial services powerhouse providing

ITM Business School, Navi Mumbai, Kharghar Page 9

Philosophy: You come first.

1.3 About Founders

1.4 Flagship in Other Services

ITM Business School, Navi Mumbai, Kharghar Page 10

As always, we put your needs first.

“ No questions. Only Loans.”

Flexible loan tenure of up to 4 years (i.e. 1 month to 48 months).

Loans available from a minimum of Rs.10, 000 up to a maximum of Rs.100,000.

1.4.3 Real Estate

1.4.4 Indiabulls Resources Ltd

ITM Business School, Navi Mumbai, Kharghar Page 11

1.5 Indiabulls Market Share