Crude oil prices under pressure
The price of WTI (West Texas Intermediate) crude, the US benchmark, is hovering around $50–$55 per barrel. It lost ~53% since June last year due to fears of oversupply and the rising shale gas production in the US.
Production estimates from US exploration and production companies aren’t showing any signs of a significant slowdown. Combined with weak demand, this led to a massive inventory buildup. This is putting downward pressure on crude oil prices.
Impact on companies
Any significant fall in crude oil prices greatly impacts iron ore companies engaged in seaborne trade. This is because oil prices affect shipping rates.
Companies also use diesel for inland transportation and for running generators in some areas. A fall in crude oil prices leads to savings in this area. As a result, Rio Tinto (RIO) will benefit from lower oil prices due to savings on raw materials and freight costs.
In contrast, declining crude oil prices are like a double-edged sword for BHP Billiton (BHP). For this company, oil prices cut both ways. Close to 22% of BHP Billiton’s earnings relate to its petroleum division. So, any significant fall will lead to losses.
Overall, falling oil prices are positive for iron ore players, including Vale SA (VALE) and Cliffs Natural Resources (CLF). The quantum of benefit also depends on the hedging used on fuel exposure and the percentage these costs make up of the total costs.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) is an efficient way to get exposure to this sector without having to choose individual companies. Rio Tinto forms 11% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metal and mining companies.