End to seasonal stock build likely to signal end to iron ore price rally

Prices for the steel-making raw material declined to a near decade low in mid-January, but have since surged by 37% to $47.73 per tonne, its highest level since June. Prices have surged amid restocking by Chinese steel mills and signs of decreased iron ore supply.

Chart: Apr-16 iron ore futures contract

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Set in a longer term context, this move is a drop in the ocean. Just two years ago iron ore prices were over $120 per tonne.

In China, which accounts for about 50 per cent of global steel supply, benchmark steel prices have also climbed, bolstering mills’ margins. Rebar, used in construction, closed at 1962 yuan ($US301) a tonne earlier this week after closing at a record low of 1626 yuan in November.

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Investors long on crude should be wary of shale producer hedges

Investment bank Societe Generale believes investors should look to purchase WTI crude futures contracts for Dec-17 at $45 per barrel or lower, given their view that the price is unsustainably low.

The same Dec-17 WTI contract hit a record low of $37.38 per barrel in January, rebounding to the low forties as rumours of an OPEC/Russia production cut surfaced.

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Crude returns: How low oil prices have broken the relationship to food prices

Until recently, the price of crude oil and food moved largely in tandem. Since 2005 the correlation coefficient between the two price series (sourced from the IMF) has been +0.84. However, since late 2014 food prices have significantly outperformed crude oil prices.

Chart: Crude oil versus food prices

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Note: The IMF food price index includes cereal, vegetable oils, meat, seafood, sugar, bananas and oranges while their crude oil price index is an average of Brent, WTI and Dubai.

Energy is a vital component of a farm’s operating costs. Direct energy consumption includes the use of diesel, electricity, propane, natural gas and renewable fuels for activities on the farm. Indirect energy consumption includes the use of fuel and feedstock (especially natural gas) in the manufacturing of agricultural chemicals, such as fertilisers and pesticides.

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