What made imports and prices diverge?
In 2010, iron ore imports barely rose compared to 2009 levels, after a surge in iron ore prices that nearly doubled (from ~600 renminbi per metric tonne of iron ore to ~1,200 renminbi). The surge was driven by worldwide government stimulus to save the global economy from further collapse. Although China’s economic growth started to fall in mid 2011 after the government raised the interest rate in order to rein in high price appreciation (inflation), traders started to import more iron ore due to falling iron ore prices.
This increase in iron ore import eventually led to an inventory buildup, with the amount of iron ore at major ports in China rising from 73 million metric tonnes to 100 million (see chart above) throughout 2011.
Prices and imports tagged each other from 2006 to 2009
While iron ore prices and iron ore imports both rose and fell in tandem from mid 2006 to the end of 2009, higher imports (driven by a robust demand for real estate in China that eventually led to a bubble) were the key driver of higher prices, instead of the other way around. After the United States’ financial crisis began and China rose interest rates to a decade high of 7.46% in order to burst the real estate bubble, economic growth fell. As demand fell, prices for iron ore fell. But even though iron ore prices were falling, traders weren’t confident in importing more iron ore, as they saw year-over-year sales growth for buildings collapse from 44% during the last month of 2007 to -4.44% two months later (see chart above).
Learn more about commodity prices and dry bulk shipping
To learn more about commodity prices and their significance for dry bulk shipping stocks, continue to Must-know: Commodity prices and dry bulk shipping stocks (Part 4: Imports and shipping rates).
© 2013 Market Realist, Inc.