--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Dec 4 Copper and iron ore
demand and prices both stand to rise, given the improvement in
both of China's purchasing managers' surveys, but the
steel-making ingredient may have scope for bigger gains.
While there are fundamental reasons why iron ore may
outperform copper, perhaps the most convincing analysis is
looking at the price ratio between the two.
Benchmark three-month Shanghai Futures Exchange copper
futures, converted to U.S. dollars, currently trade
about 80 times the price per tonne of spot iron ore
While this is down from the 101 times recorded on Sept. 4,
it's still near the highest since iron ore swaps started trading
in Singapore in 2008.
Looking at the ratio between the two over the past four
years, there have been about three periods when the ratio has
reached levels above 80 for a sustained period before the
In March 2009, the ratio was about 83 times, in September of
the same year it was above 95 and in October last year it was
Each time the ratio has reached these levels, it has
subsequently moved lower.
For example, by mid-August 2009 it was down to 68, by April
2010 it fell to 47 and in November 2011 it was 59.
What is common to the three examples above is that every
time the ratio was high, it moved lower by iron ore rallying
harder than copper.
Likewise, every time the ratio widened again it was because
iron ore fell faster than copper.
In the current situation the ratio has narrowed from the 101
seen in September, but given it's still as high as 80, there
would appear to be scope for it narrow even further.
This analysis also shows that the iron ore market appears to
be more volatile and tends to overshoot to both the top and the
bottom of each pricing cycle.
It's apparent now that iron ore's third-quarter slump to a
low of $86.70 a tonne, the weakest price in three years, was
worse than justified even by the slowing of growth in major
At the time iron ore was crashing, Shanghai copper was
relatively stable in dollar terms, and iron ore's subsequent
rally to current levels around $115 a tonne still leaves plenty
of room for the ratio to the copper price to narrow further.
It would take an iron ore surge to above $150 a tonne to
bring the ratio back to 60 times, a level historically
associated with times when iron ore starts to once again
It's also worth pointing out that just because the ratio has
narrowed in the past due to iron ore rallying, this doesn't mean
this will necessarily happen again.
It could be that this time copper declines while iron ore
remains relatively stable, and certainly there are a few reasons
to believe the red metal may struggle.
Rising mine supply in 2013, anecdotes of elevated levels of
unreported stockpiles in China and an uneven economic recovery
may weigh on copper.
The official China Purchasing Managers' Index, which rose to
a seven-month high of 50.6 in November, also shows growth is
being led by the state sector, with large enterprises
undertaking infrastructure spending.
This is probably more supportive of iron ore, given that
building infrastructure such as railways tends to be more steel-
In the present environment of a modest recovery in China,
being led by state capital expenditure, it seems that iron ore
is a better bet than copper.
(Editing by Clarence Fernandez)