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.

All commodities are not created equal.

If you judged the oil market by what you heard on the evening news, you'd think that a widely quoted contract like Brent crude was the same stuff most tankers carry and refineries buy.

In truth, output from the North Sea fields that goes into the Brent benchmark amounts to about 1 percent of global oil production. Most traded oil comes in a dizzying array of varieties differentiated by sulfur content and density.  The basket price for heavy, sour Venezuelan crudes is running at around $46.76 a barrel, an almost $10 discount to sweet, light Brent's $56.48/barrel, which itself is cheaper than the $60.62/barrel price of spot oil from Malaysia's Labuan terminal.

The Great Unravelling
The price spreads between iron ore grades used to be tight. That's changing
Source: Shanghai Steelhome E-Commerce, Bloomberg

Something similar exists in the iron ore market. The red rock from which most steel is made comes with varying degrees of iron content and particle size, and prices vary accordingly.

While the cost of different grades has tended to move in fairly close sync, that's changing. Take the price for lower-quality Indian iron ore with a 58 percent to 59 percent iron content, and compare it to the best Brazilian ores that come in at 65 percent. For most of the past five years, the Brazilian rust has cost about a third more than its Indian equivalent. Then, over the past 18 months, this happened:

Luxury Goods
The premium for high-iron content Brazilian ore over its Indian equivalent has hit a record
Source: Shanghai Steelhome E-Commerce, Gadfly calculations

There's a well-understood reason for this. The sintering plants that turn the powdery iron ore known as fines into a product that can be fed into a steel blast furnace are horrendously polluting. Emissions from the knot of steel producers in Hebei province surrounding Beijing are one of the main reasons why China's capital has such a notorious reputation for smog. One of the best ways of reducing this pollution is to use higher-grade iron ore, which has less waste material and needs a smaller amount of coke in its sinter mix.

It's no coincidence this premium is reaching a record now. With the Communist Party's five-yearly Congress starting next week, the country's steel industry and the provincial bosses who oversee it have been presented with a tough challenge. On one hand, they're trying to patriotically demonstrate the strength of the economy by having China's primary industries running at full tilt; on the other, they want blue skies for when party cadres visit.

One way to meet both objectives is shutdowns: Hebei's steelmaking hub of Tangshan announced with just a day's notice on Wednesday that it would start a seasonal closure of half the city's production a month early, according to A smarter approach, though, would be to buy more higher-grade ores to ensure the best possible ratio between production and pollution.

There's evidence of the same pattern cropping up elsewhere. The premium for lump iron ore, a variety that can be fed directly into blast furnaces without the need for sintering, also touched a record last month, based on Singapore-traded futures that reference S&P Global Platt's prices.

Here Comes the Sun
Readings of PM2.5 pollution in Beijing are running at unusually low levels
Source: U.S. State Department

More to the point, the skies appear to be clearing. Last Tuesday, there were just 4 micrograms of PM2.5 particulate pollution per cubic meter of Beijing air, according to data collected at the U.S. embassy in the city. That compares to 173 micrograms on the same date a year earlier, and 332 micrograms in 2014. The average reading so far this month has been 38μg/m³, versus 98μg/m³ over the previous four non-Congress years.

Those conditions may be extreme due to political imperatives, but they have longer-term importance. China can't keep choking its citizens with winter smog, yet it's still having trouble kicking the habit of falling back on state heavy industry as a tool of economic development.

Flight to Quality
The price-book premium accorded to Fortescue's superior profitability is vanishing as the higher-grade iron ore mined by Vale becomes more prized
Source: Bloomberg

Squaring that circle is likely to keep the spread of higher-grade ores over lower-grade equivalents wide for some time to come. It's no surprise, then, that the price-book ratio of Fortescue Metals Group Ltd., which produces mostly lower-grade ores, is now barely ahead of highest-grade producer Vale SA, despite far superior returns on equity.

So long as the sun is shining in Beijing, the world's best-quality iron ore will feel its glow.

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

  1. Sweet, light crudes are generally favored because they score low on both measures.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at