Iron ore is not like oil – by Jonathan Ratner (National Post – May 14, 2015)

The National Post is Canada’s second largest national paper.

Investors may be tempted to think the recent increase in oil prices foretells similar gains in iron ore, but Ben McEwan at CIBC World Markets says these expectations are based more on hope than anything of substance.

For one thing, the analyst found little historical correlation between the two commodities since it is lower than the correlation between other industrial commodities such as copper, nickel, aluminum and metallurgical coal. Over both 12- and five-year periods, only met coal demonstrates a lower correlation to oil than iron ore.

There is also an argument that large iron ore producers are on the verge of supply-side discipline, which should support prices as it has in the oil sector.

McEwan compared Saudi Arabia’s position in the oil market to China’s in the iron ore sector, noting that both are significant producers that have avoided making material output cuts. “However, this is where the similarities end,” the analyst said.

Chinese iron ore production remains near the top of the cost curve, while Saudi oil production is far more economically even at lower oil prices.

He also pointed out that Chinese iron ore production remains captive within the country, whereas the vast majority of Saudi oil production is exported.

Seaborne suppliers of iron ore hope that lower-cost supplies will displace higher-cost domestic Chinese production, but McEwan noted “China is not yet a fully rational actor when it comes to heavy industry economics.”

For the rest of this article, click here: http://business.financialpost.com/investing/trading-desk/iron-ore-is-not-like-oil?__lsa=7b33-0704

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