Iron ore and oil down to financial crisis levels
Iron ore and oil, for ages among the strongest commodities, are on course for their biggest annual decline in over five years, with crude down the slippery slope in the last days of 2014.
The steel-making ingredient is ending the year almost 50% lower, making it the most likely winner of the worst performing commodity of 2014 title.
Ore with 62% content delivered to Qingdao, China, recovered a bit Tuesday, trading at $71.15 after hitting $66.84 on Dec. 23, the lowest in more than five years, based on data from the Metal Bulletin Ltd.
Oil, in turn, closed Monday at a fresh five-and-half-year low on fears that rising violence in Libya would resolve a looming oversupply. Brent crude has lost 48% this year and it is on course for its biggest annual decline since 2008.
Blame the oversupply
Analysts initially pointed to expanding output, as well as energy efficiency and alternative sources such as renewables, as the main factors behind the drops.
The iron ore glut emerged this year after a record expansion of mine capacity and as China, the world’s second-largest economy, grew at the slowest pace in two decades. The surplus will reach 300 million tons by 2017, because Chinese steel production is unlikely to expand fast enough to absorb the excess supply, Goldman Sachs said in a Nov. 6 report.
For oil, something similar happened. Crude prices began plummeting since the Organization of Petroleum Exporting Countries (Opec) agreed in November to leave its production quotas unchanged at 30m per day, prompting a price war with producers outside the Middle East-dominated cartel.
Opec members are concerned about the loss of market share to shale oil drillers in the U.S and increasing supply outside the group, which has weighed on prices.
But with no end to both iron ore and oil prices slump, it became evident that other factors were also at play. Among them, the cooling of emerging economies and the ongoing downturn in developed markets, according to a National Australia Bank’s report on Dec. 15.
The question is what to expect next. Forbes columnist and author of the book “23 Things We Are Telling You About Capitalism,” Tim Worstall, seems to have the answer:
The answer [to the question of whether iron ore and oil prices will continue to fall] there seems to be that yes, it probably will. Because even at current prices there’s still more production than there is demand for it. Meaning that some producers will need to leave the market, curtailing supply, before prices rise again. It is, of course, possible that lower prices will stoke demand but the demand led price cycle for iron ore is long and it’s probably, with crude oil, longer than the influence of low prices on supply.