Why China’s Escalating Port Inventory Is Bad for Iron Ore Prices
China’s iron ore port inventory
China’s (MCHI) iron ore port inventory is a key indicator that reflects the commodity’s supply and demand balance. It also indicates the safety net and imbalance between the iron ore supply and steel mill demand. High inventory is a sign of weak demand for the raw material, and vice versa.
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Inventory inching up
Iron ore inventories have risen by 14% since the start of 2016. Inventories for the week ended August 26, 2016, totaled 105.2 million tons. This was the highest level since December 2014. It also meant that inventories weren’t being used up as quickly as they were increasing.
The current inventory translates to an inventory-to-steel production ratio of ~1.6x. This ratio is often preferred by analysts over raw inventory figures for tracking progress in the sector. The ratio measures how much inventory is available to keep steel production activity going.
The ever-increasing inventory at the ports amid steel demand that doesn’t seem sustainable could hurt iron ore prices. This is negative for iron ore players involved in the seaborne iron ore trade, including BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (VALE), and Cliffs Natural Resources (CLF).
The SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. BHP forms 5.0% of its holdings.
In the next part of this series, we’ll look at China’s steel production and demand outlook. This is vital to determine the outlook for seaborne iron ore prices.