Oil prices have dropped below zero recently. But on the other hand, iron ore prices are buoyant. What causes one commodity price falling below zero and the other one stay elevated. I though most commodity prices (hard commodities ) are correlated.
Is there any correlation between oil and iron ore prices?
There is a strong correlation between oil prices and iron ore prices. However, currently, both markets are influenced by different factors. Iron ore prices, on one hand, is under pressure by the falling production levels but on the other side underpinned by recovering Chinese market and limited shipping routes.
Oil prices which reached historically low levels are partly forced down by oversupply from Saudi Arabia and Russia. It was quite clear from the failure of negotiation back a few weeks ago that oil prices will be in the doldrums.
Iron ore prices are expected to remain stable despite oil prices have started falling.
Iron ore prices remained buoyant despite finished steel prices have been heading downwards. One of the driving factors behind the stable iron prices is the high demand in China. Production cuts outside China have added some pressure on iron ore prices at the start of the pandemic but the downward pressure was counterbalanced by the recovery in China.
Interestingly, Chinese finished crude steel demand has remained slightly lower than crude steel demand. This implies that semi-finished inventories are getting higher due to lesser downstream. High semi-finished inventory can be an issue to put some pressure on the iron ore prices in the coming weeks.
Iron ore supply remained elevated so far. BHP Billiton reported that its iron ore production increased by 6.9% in the first quarter compared to the same quarter last year to 60 million tonnes. Its cumulative production over the past nine months (July 2019 – March 2020) also increased by 3.5% compared to the same period last year, reached 181 million tonnes.