1. International Steel & Minerals Conference - Umetal
Freight Investor Services
Michael Gaylard
Volatility and Risk Management in the Dry Freight and Iron Ore Market
March 2009

2. Who We Are
FIS was founded as an independent boutique broking house and risk management consultant in October 2002 and offers:
Impartial and accurate risk management guidance and advice on the dry freight, iron ore, physical shipbroking and fertilizer derivative markets
Full brokerage services
Daily market reports and continuous market updates
The company is fully registered and regulated by the Financial Services Authority (FSA) in UK and the Monetary Authority of Singapore (MAS) in Singapore.
With our global office network in London, Singapore, Tokyo, Germany, New York and Athens, we are perfectly positioned to offer a full 24 hour market coverage.

3. FINDING APPROPRIATE SOLUTIONS TO MANAGE PRICE RISK
Agenda
Current Market View
FFA Outlook & Volatility
Counterparty Risk
Iron Ore Spot
Looking from the outside in
IOS Swaps Outline
Iron Ore Future Developments
Market Entry
Conclusions
FINDING APPROPRIATE SOLUTIONS TO MANAGE PRICE RISK
Freight
Iron ore
Steel

4. Current Market view: Credit
Selected CDS Spreads
Financial markets crippled by worst crisis since Great Depression
Toughest credit environment corporate world has faced in decades
Credit spreads remain very wide and lending is extremely restrictive

5. What do the Fundamentals Say?
GDP Growth (Percent Change)
Projections
2007
2008
2009
2010
Germany
2.5
1.3
-2.5
0.1
France
2.2
0.8
-1.9
0.7
Italy
1.5
-0.6
-2.1
-0.1
Spain
3.7
1.2
-1.7
United Kingdom
3.0
-2.8
0.2
United States
2.7
1.0
-2.0
1.1
China
13.0
9.0
6.7
8.0
India
9.3
7.3
5.1
6.5
* Data produced by International Monetary Fund as of January 2009

6. Seaborne Trades (mil tns)
Cargo Demand
Seaborne Trades (mil tns)
2007
2008
2009
2010
Iron Ore
(Percentage Range)
796.0
(12-15%)
886.0
(18-22%)
870.0
(20-24%)
895.0 ??
Coal - Coking
218.5
226.7
212.0
238.0
Coal - Steam
596.1
608.3
625.0
645.0
Grain
196.3
203.4
198.5
202.0
Others (Minor Bulk)
337.9
337.2
311.8
335.0
Total Percentage Change
4.0%
-2.1%
4.4%

7. Current Market view: Dry Freight
Spot versus Forward rates outlook

8. Baltic Dry Index Volatility
Freight Market does not follow a normal distribution!
Risk Management and Hedging more pertinent given recent volatility
Momentum driven Vs Fundamental market

9. Freight Supply Fleet 393.67 421.94 462.26 Deliveries 24.55 23.82 49.93
Fleet Supply (mil DWT)
2007
2008
2009
Fleet
393.67
421.94
462.26
Deliveries
24.55
23.82
49.93
Conversions
0.14
6.53
4.47
Deletions
0.63
2.79
14.51
Net Change
24.06
27.56
39.89
Expectation is for deletions to continue its strong rise.
Unless currently in progress, do not expect any further conversions.
Tonnage delivered will be strongly dependent on time charter rates, as financing needs to be met.

10. Financial Effect Fleet Supply (mil DWT) 2009 YTD
Slippages/Cancellations
45%
Orderbook 47
Deliveries 19
2007 Jun
2009 Mar
Panamax 75-77K Newbuilding
$46 mil
$38 mil
TC Avg for the month
$46,449
$14,948
Breakeven analysis
2 yrs 9 mth
7 yrs
Handysize 25-30K Newbuilding
$30.5 mil
$26.5 mil
£28,147
$10,685
3 yrs
6 yrs 10 mth

11. Major Seaborne Trade vs FFAs
Oil: 7 to 10 times the nominal trade volume
Power: 5 to 10 times the nominal trade volume
Coal: 3 to 5 times the nominal trade volume
The current multiple of physical freight to FFAs is 1:1.3 in metric tons

12. Clearing Houses Freight Future Developments: Move towards Clearing LCH
NOS
SGX

13. The Clearing Houses
Clearing House’ Market Share

14. Current Market view: Iron Ore
Spot versus Forward rates outlook

15. Comparison between benchmark system and spot pricing
More stable prices which might not be reflective of current market conditions
Highly inflexible in volatile market conditions
Spot Pricing System
Offers more flexibility
Will result in prices that are more reflective of market conditions
Does not change long term relationships with existing clients

16. Iron Ore Producers Equity Price Volatility:
Vale, Rio Tinto & BHP Billiton
Excess
Volatility
In recent
Months!

17. Correlation between iron ore prices and iron ore producer stock prices
Vale
Rio Tinto
BHP Billiton
Iron Ore Fines cfr China 63.5%
88%
92%
85%

18. Correlation between iron ore prices and steel mill stock prices
Baosteel
Arcelor Mittal
Nippon Steel
Iron Ore Fines cfr China 63.5%
63%
86%
21%

19. Correlation between iron ore prices and freight and steel prices
BDI
Steel Rebar 25mm
Iron Ore Fines cfr China 63.5%
85%
81%

20. FIS Swaps: The Appeal
“Natural sellers” (iron ore producers) can “lock in” margin progressively for a proportion of their length
Traders can “lock in” margin in a rising or falling market
End users can secure a forward price and manage exposure to physical market volatility
Price discovery – swaps provide an opportunity to test the strength of forward prices and the depth of the market without committing product or capital
Margin management – building a swaps position in tandem with a physical book allows margins to be secured and management of exposure to extreme price changes in the physical market
OTC turnover estimated to be approximately 9,000,000 tonnes

21. Index Specifications The Steel Index TSI Metal Bulletin MBIO
Platts IODEX
Content
62% Fe
Origin
Non Origin Specific
Non Origins Specific
Delivery
CFR China Tianjin
CFR China
CFR Qingdao
Price Available
Subscription only
Frequency
Weekly
Daily
Publication Time
Every Friday evening
Price Derivation
Actual Physical Trade
Price Discovery Basis

22. Iron Ore Future Developments: New index performance
New indices all based on robust 62% methodologies
Maximum deviation from average has been 5%

23. Market Entry
Any new client seeking to enter the market needs simply to register with FIS Ltd and provide a bid or an offer
It should be noted:
The FIS Ltd standard contract is used to conclude an FIS cash- settled swap
FIS swap contracts are “principal-to-principal agreements” – counterparties contract directly with one another, FIS is purely a broker
The FIS contract has been designed in accordance with industry standards to be mutually acceptable to counter parties
No capital investment or raw materials: Cash settlement is made against invoice at the end of the contract period, on the specified settlement date
credit terms must be established before any contract can be concluded 23

24. Sample of Daily Iron Ore Report

25. Thank you for your attention!
24 Hours Service + 40 Brokers
Dry FFA’s & Options
Iron Ore Swaps & Options
Cargo Sourcing / Advice
Shipbroking / Research
Risk Management Strategy