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Should Iron Ore Investors Brace for More Downside?

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Part 4
Should Iron Ore Investors Brace for More Downside? PART 4 OF 10

How Iron Ore Inventories Are Affecting the Outlook for Prices

China’s iron ore port inventory

China’s iron ore port inventory reflects the commodity’s supply and demand balance. It also indicates the safety net and imbalance between iron ore supplies and steel mill demand. High inventory levels are a sign of weak demand for raw materials, and vice versa.

How Iron Ore Inventories Are Affecting the Outlook for Prices

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High inventory levels

Iron ore inventories at Chinese ports have risen 17.5% YTD (year-to-date). Port inventories stood at 130.4 million tons on April 14, 2017. While inventory levels have been declining gradually, they are still close to a record high, standing at an inventory-to-steel production ratio of 1.9x.

Analysts often prefer an inventory-to-steel production ratio over raw inventory figures for tracking progress in the sector. The production ratio measures how much inventory is available to keep steel production activity going. The average for this ratio over the past five years has been ~1.5x.

Negative fallout

Growing inventories at ports amid steel demand that doesn’t seem sustainable have started hurting iron ore prices. This trend will be negative for seaborne iron ore players such as BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and Cliffs Natural Resources (CLF).

The SPDR S&P Global Natural Resources ETF (GNR) tracks the Natural Resources Index. BHP makes up 5.0% of GNR’s portfolio holdings. Production and demand are vital in determining the outlook for seaborne iron ore prices. In the next part of this series, we’ll look at the outlook for China’s steel production and demand.

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