It's funny how markets work.
Shareholders in Beach Energy Ltd (ASX: BPT) or Santos Ltd (ASX: STO) have their day ruined by a fall in the value of crude oil.
At the same time, shareholders of Qantas Airways Limited (ASX: QAN) and Regional Express Holdings Ltd (ASX: REX) are jumping for joy because lower oil means lower costs which means more profits – or potentially a profit in Qantas' case.
Now Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) shareholders are experiencing a hidden perk as the price of oil substantially reduces the cost of shipping their iron ore to China.
The decline in the value of crude oil is estimated to be saving Rio approximately $1.50 a tonne on its iron ore shipping costs – or $450 million dollars a year if the low prices were to persist for that long.
Other companies like BC Iron Limited (ASX: BCI) are likely to experience similar benefits on a smaller scale; although the savings are not enough to offset the decline in the value of iron ore, they might just provide the extra insulation companies need to keep their head above water.
Several iron miners are perilously close to trading at a loss as prices dance around the $69-$70 per tonne mark.
With further falls in the value of iron ore predicted, the savings on transport are definitely not enough to warrant an investment, but it's a potential fringe benefit.
The falling price of oil is a double edged sword to companies like BHP Billiton Limited (ASX: BHP) and MMA Offshore Ltd (ASX: MRM) who are exposed both ways to the oil market.
As a producer and iron exporter, BHP is likely to be worse off since the fall in oil revenues is substantially greater than savings of a few percent on iron ore costs.
MMA – formerly Mermaid Marine Australia – is in a more interesting position, since lower oil prices mean substantially lower costs to operating its fleet of service vessels.
However MMA also derives most of its income from contracts with oil companies, and sustained low prices will see the potential for new contracts wither over the medium term.
Investors should watch closely.
