Australian Investment Blog

Will Iron Ore and Oil continue to diverge? Last month when iron ore spiked up around $US70/tonne and oil was trading in the low $US40/barrel region, we called for a downturn in commodity prices, caused by a strengthening $US, but oil would remain firm. So far this view has unfolded perfectly with iron ore falling ~28% and gold ~6%, however oil has risen ~15%. Simply, while the $US has an enormous impact on commodity prices, it is not a larger influence than basic supply and demand. The big question is do we believe iron ore will continue to fall, while crude oil can / will rally? The best way to address this fundamental question is to look at the two commodities individually. Iron Ore made a 3 month low last night, but remains over 20% above the lows of last December. We believe the risks remain firmly on the downside, with fundamental concerns around the Chinese economy likely to resurface again in the medium term. Any worries around China are likely to hammer iron ore, as they did recently in the December / January period. We believe iron ore will challenge the $US30-35/tonne region this year. Hence, we currently have no interest in buying stocks like BHP, Fortescue (FMG) and RIO. Iron Ore Monthly Chart Crude oil has remained firm over the last 6 weeks and last night, challenged the psychological $US50 barrel area.
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