The Future of Iron Ore Indices

On Nov. 26, 2018, S&P Dow Jones Indices (S&P DJI) launched the S&P GSCI Iron Ore and the S&P GSCI Industrial Metals & Iron Ore Equal Weight to provide investors exposure to one of the most important industrial commodities in the world. Iron ore is the second-largest commodity market by value after crude oil and is a major industrial component of the world’s second-largest economy, China. The S&P GSCI Iron Ore is benchmarked to the SGX TSI Iron Ore CFR China (62% Fe Fines) Index Futures. The Singapore Exchange (SGX) is the home of international iron ore derivatives, offering Iron Ore CFR China (62% Fe Fines) swaps, futures, and options.

Offering investors an index benchmarked to an iron ore futures contract provides insight into the steel market, as iron ore is the primary raw material used in the production of steel, which is the key material used in construction, ship building, and other heavy manufacturing activities. China has the world’s largest steel industry and is the main importing nation for global seaborne iron ore. China’s crude steel production is forecast to reach a new annual record of 923 million metric tons in 2018,[1] despite ongoing anti-pollution measures to shut down low-grade steel capacity and the ever-evolving China-U.S. trade war. Major iron ore producing countries include Australia and Brazil, where iron ore production and prices can have a significant impact on economic growth, terms of trade, and local currency fluctuations. The introduction of the S&P GSCI Iron Ore and S&P GSCI Industrial Metals & Iron Ore Equal Weight opens up this investment universe to global investors.

Exhibit 1 depicts the summary statistics of the performance of iron ore compared with the commodities included in the industrial metals sectors.

While iron ore is defined as an industrial metal according to S&P DJI’s commodity sector definition, the futures contracts behind the other industrial metals indices are for processed or semi-processed metals, while the iron ore contract refers to a raw material. Looking at the three- and five-year returns of the industrial metals commodities, iron ore was the best-performing commodity on a three-year annualized and risk-adjusted return basis, and the second-best performing commodity on a five-year basis after zinc. In terms of correlation, the ferrous metal exhibited the lowest correlation among the industrial metals.

[1]   China Metallurgical Industry Planning and Research Institute.

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