Iron Ore & Crude Oil: The Similarities & Differences In The Market Dynamics Of These Commodities

Iron ore is the world’s second most traded bulk commodity after crude oil. Interestingly, there is a great deal of similarity in the supply-side dynamics of the trade in the two commodities as well, though the demand-side dynamics are fairly different. In this article, we will compare the markets for crude oil and iron ore in terms of their supply and demand dynamics.

Supply Side

The Organization of Petroleum Exporting Countries (OPEC) is a cartel that dominates international trade in oil. OPEC countries together account for around 60% of the supply of the crude oil traded internationally. ^[1] Thus, OPEC countries enjoy considerable pricing power and usually act in concert to regulate production levels and influence oil prices.

Analogous to the dominance of OPEC in the market for crude oil, Australia and Brazil are the two largest suppliers of iron ore in the global iron ore trade. Taken together, Brazil and Australia account for around 80% of the supply in the seaborne iron ore trade. ^[2] The major Australian and Brazilian iron ore producers (particularly Vale, Rio Tinto, BHP Billiton, and Fortescue) have access to low-cost iron ore reserves and can continue to operate profitably at lower iron ore prices as compared to most other global producers. Though there is no overt collusion between these producers, since China constitutes the major market for all of these producers, they change production levels largely in response to demand conditions in that country. Thus, in several instances, these companies operate as a unified supplier group, for all practical purposes. Sharp increases in production by these companies resulted in a sharp decline in iron ore prices between 2013 and 2015, forcing a number of high-cost producers to curtail production.

Demand Side

Whereas there are considerable similarities on the supply side for international trade in the two commodities, the demand side is fairly different. The U.S. and China are the world’s largest importers of crude oil, with the pair accounting for around one-third of the world’s crude oil imports. ^[3] The two countries have similar shares in world oil imports with China expected to edge ahead of the U.S. going forward. Thus, even the most dominant player from the perspective of crude oil imports accounts for around 16% of the share of the world’s crude oil imports.

In terms of the seaborne trade of iron ore, China is by far the most dominant player, accounting for nearly two-thirds of the world’s imports of the commodity. ^[4] Thus, the demand for iron ore and consequently, prices of the commodity, are to a very large extent determined by fluctuations in the demand for the commodity in China. In contrast, China does not enjoy this kind of influence in the market for crude oil.

Thus, the dynamics of the supply-side for international trade in iron ore and crude oil are fairly similar, whereas the demand-side differs considerably. The following tables summarize this:

Have more questions about Rio Tinto? See the links below.

• What Is China’s Share Of Rio Tinto’s Overall Revenue?
• Why Brexit Will Not Significantly Impact Iron Ore Prices

Notes:

1. What drives crude oil prices: Supply OPEC, EIA [↩]
2. Australia, Brazil to control 90% of global iron ore trade by 2020, Mining.com [↩]
3. OPEC Annual Statistical Bulletin 2015, OPEC [↩]
4. China on track to import 1 billion tons of iron ore this year, Mining.com [↩]