The impact of falling crude oil prices
Iron ore and crude oil were the worst-performing commodities of 2014. Both are down to more than five-year lows, having lost close to half of their value since the start of 2014.
Brent crude oil is trading at $61 per barrel compared to $114 per barrel in June 2014. WTI (or West Texas Intermediate) crude oil is trading at $50 per barrel compared to $106 per barrel in June 2014.
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 have energy costs to consider. A fall in crude oil prices leads to savings in this area. As such, Rio Tinto (RIO) will positively benefit from lower oil prices due to savings on raw materials and freight costs.
On the other hand, 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’s earnings relate to its petroleum division, so any significant fall will lead to losses there.
Overall, falling oil prices are positively impacting 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.
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. All listings of RIO form 11.7% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests metals and mining companies.