Iron ore restocking activity
The sharp rise in the Baltic Dry Index that many analysts saw first in late August and second in November was in part driven by restocking activity of iron ore at Chinese ports. Iron ore inventory, which dropped to below 70 million metric tonnes in early 2013, recovered to levels above its last five-year long-term trend line. On January 24, 2014, iron ore inventory levels had risen to 89.8 million metric tonnes, according to Antaike Information Development Co.
A low inventory level was one of the positive factors that set the foundation for higher rates in late 2013. Now that iron ore inventory levels at Chinese ports have climbed above the last five years’ trend line, it becomes harder to say that inventory would be a catalyst for higher rates in 2014.
Iron ore inventory as a percent of China’s monthly crude steel production came in at 1.30 times in December 2013, which was lower than the 1.32 times for the prior month. Over the past five years, the ratio averaged 1.42 times—fairly consistent until June 2011, when traders continued to import more iron ore at a rapid pace even as China’s economic growth slowed.
Running out of quality iron ore
But China is also running out of high-quality iron ore mines (see the bottom left chart above). While iron ore output has soared since 2011, the actual amount of iron that could be refined has fallen. Excluding the spike in 2011 that was driven by higher iron ore prices, adjusted iron ore output has trended sideways.
Last year, China’s steel production grew 9.2% on an annual basis, while iron ore imports grew 10%. Investors might think that restocking activity could have contributed more, but recall that the first half of 2013 was relatively weak for the iron ore market, which could be attributable to uncertainties regarding the property market and a period of lower economic growth.
Cheaper seaborne iron ore
With iron ore prices forecasted to fall as new supply from cheap producers such as Rio, BHP, Vale, and FMG come online, some Chinese miners will become uneconomical and be replaced. Prices for iron ore are already $15 per metric tonne and even more expensive than the seaborne market.