David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The world's big three iron ore producers -- Vale, Rio Tinto and BHP Billiton -- tend to bristle at comparisons to its biggest oil producers.

The oil market, after all, is dominated by state-owned companies that are explicit in their desire to act in their long-term national strategic interests. The largest iron ore producers are commercial businesses with international stock-exchange listings.

``We're not trying to be Saudi Arabia at all," Rio Chairman Jan du Plessis said at the company's annual shareholder meeting in London last week.  ``We have no desire to squeeze anybody out of the market."

With production results on Tuesday showing iron ore production up 13 percent from a year earlier during a March quarter when prices lingered near the lowest in eight years, you might want to take that assertion with a pinch of salt.

Still, the trio should be glad they're not Saudi Arabia -- and not because they don't operate an oligopoly. Quite the contrary: They should be grateful that their oligopoly is so much more effective than what operates in the oil market.

Looking at the progress of oil and iron ore prices over the past few years, it's striking the degree to which they've started moving in parallel. Compared with their levels three years ago, their movements since the start of the year could almost be drawn with a single pen:

A Cycle Built for Two
Oil and iron ore prices have been moving in tandem this year
Source: Bloomberg data
Note: Figures have been rebased. April 22, 2013=0.

That doesn't mean the pattern will hold, especially if the recent rally in commodity prices peters out. 

The problem for the members of the Organization of Petroleum Exporting Countries is that, contrary to perceptions, they don't really constitute a cartel, or anything close to it. The five biggest producers in the global oil industry -- the U.S., Saudi Arabia, Russia, Canada and China -- control about 48 percent of the market. In iron ore, the equivalent figure is about 77 percent:


Look at the top four firms -- a measure watched by economists and antitrust regulators known as the four-firm concentration ratio -- and the difference is even starker. As a rule of thumb, industries where the top four players have more than about 60 percent market share tend toward oligopoly. Those where they have less than 40 percent count as competitive. Iron ore, with 72 percent, doesn't look very competitive. Oil, with the top four on 43 percent and even OPEC bumping along at just above 40 percent of global oil production for most of the past two decades, does.

I Walk the Line
OPEC's share of world crude oil production has been just high enough to limit market competition
Source: BP Statistical Review, Bloomberg data
Note: Levels above 40% indicate lack of competitiveness.

That's bad news for oil producers, but good news for anyone digging up iron ore. Have a look at this BP illustration of oil producers' costs and you can see how painful current conditions are for commercial oil companies:

Oil cost curve

A line drawn across from the current $40-a-barrel level on the y-axis intersects the curve around the 50 million-barrels-a-day mark on the x-axis. All output to the right of that point -- about half of conventional oil production outside the Middle East, plus the entire shale, offshore and oil sands sectors -- is losing money at current prices.

Now look at the comparable chart for iron ore, this time from a Reserve Bank of Australia paper:

Iron ore cost curve

At current prices of $60-a-ton, almost all Chinese iron ore mines are losing money, but most pits outside the country are profitable. Were prices to fall far enough to cause one of the big four non-Chinese producers to close down, the resultant shortfall in supply would be enough even in the current weak demand climate to tighten the market and provoke a rebound.

Four to the Floor
Output by the big four non-Chinese iron ore miners has increased almost fourfold in a decade
Source: Bloomberg data, company reports

Iron ore producers aren't oblivious to this fact. One of the reasons they've spent the past decade in a breakneck race to increase production is that all four have been determined to avoid getting left behind in the push to increase market share. At current forecasts, Rio Tinto's output in the year through December will be 350 million metric tons, potentially putting it ahead of Vale.

Collusion, after all, isn't necessary for an oligopolistic market to exist. As long as the number of major players is small enough, second guessing the behavior of other producers may be sufficient to hold the line.

None of this means that prices for either commodity won't fall from their current levels. But it does mean those betting on a decline that'll damage the finances of commodity producers shouldn't regard all commodities as the same. A slump that could push oil producers deeper into the red may still leave iron ore miners in the black.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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David Fickling in Sydney at

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Katrina Nicholas at