Weekly dry bulk shipping critical indicator developments, August 12–16

Part 3
Weekly dry bulk shipping critical indicator developments, August 12–16 (Part 3 of 9)

Why low iron ore inventory supports iron ore shipments

Iron ore inventory

Iron ore inventory at Chinese ports reflects the safety net and the imbalance between iron ore supply and steel mill demand. When inventory levels are high, they reflect possible overpurchases by importers, which may prompt importers to cut back on imports in order to lighten up inventory in the near future. On the other hand, when inventory levels are low, importers may engage in restocking, which will aid iron ore shipments.

China Iron Ore Inventory 2013-08-18Enlarge Graph

Steel manufacturers drew more iron ore than was replenished

On August 9, iron ore inventory at Chinese ports stood at 68.9 million mt (metric tonnes), which is near the lows we’ve seen since 2009. The decline in inventory suggests steel manufacturers drew more than traders imported over the past few weeks—possibly suggesting that some steel producers have resumed production.

Inventory levels were falling, as importers tried to lighten up inventory, while China’s economy began to pick up pace mid-2012 due to economic stimulus. Before the decline, inventory levels had risen close to 100 million mt, as importers took advantage of falling commodity prices despite falling growth.

Why low iron ore inventory supports iron ore shipmentsEnlarge Graph

Inventory-to-production near five-year lows

Port inventory as a percentage of monthly crude steel production, which is the preferred indicator since it tells how much iron ore is readily available based on current output, is also near five-year lows of 100%. At the end of July, the figure was 108.57%—lower than June’s 110.56%.

Since the indicator has historically averaged ~150% and import’s share of iron ore supply in China has gradually increased from 2006, low inventory serves as a cushion for stable iron ore shipments if crude steel production falls from here. On the flip side, traders could import more iron ore, given appropriate prices, if steel production continues to grow at a stable rate.

Support and further upsides

The indicator will act as a support in weak economic conditions and show possible further upsides in iron ore shipments when economic growth is healthy. This bodes positive for DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).

The Realist Discussions