The amount of iron ore at Chinese ports is a good indicator of future iron ore shipments. When inventory levels are high, China will hold off on additional imports, lowering shipping rates for transporting iron ores from major countries, such as Brazil, Australia and India. Conversely, when iron ores are limited during times when inventory levels fall, it is often followed by increased orders sometime later down the road. Higher import quantity points to more business for shipping firms, which supports revenues, earnings and share prices.
Iron ore inventory fell, due to lower import or higher demand?
On March 29th, the amount of iron ore held at Chinese ports continued to fall from last week’s 77.7 million tons, reaching 77.1 million tons, its first time since 2010. Inventory levels have been falling throughout the month as steel manufacturers tapped into port inventories to make steel, the majority of which is used for building properties. This suggests demand was greater than firms were restocking either because China imported less iron ore or demand was larger than expected.
To figure out which it is, investors can borrow another indicator: the HSBC flash manufacturing PMI (purchasing managers’ index) that measures the level of expansion and contraction for a country.1 The latest March report for China pointed out a decline in stocks of raw materials, a higher quantity of material purchases and a larger increase in new orders. Larger quantities of raw material purchases supports the view that China did not import significantly less iron ore whereas higher quantity of material purchases and new orders suggest a stronger demand growth.
Falling iron ore inventory will be met with higher iron ore imports
As long as inventory levels continue to drop, China will likely import more iron ore. Since China’s iron ore import makes up ~20% of world’s dry bulk trade, higher iron ore imports should act as a support for shipping rates over the short to medium term. Higher shipping rates will mean more revenue and free cash flow for dry bulk firms, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Eagle Bulk Shipping Inc. (EGLE). It should also aid the Guggenheim Shipping ETF (SEA) that invests in shipping companies worldwide.
- HSBC’s flash manufacturing PMI report can be accessed from the following link: “http://www.hsbc.com/news-and-insight/emerging-markets.” ↩
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