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Marginal reduction in China iron ore port inventory

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Iron ore port inventory

The iron ore port inventory is a key indicator reflecting the supply and demand balance. If steel mills continually demand iron ore, then inventory doesn’t build up at the port. However, if mills don’t use up the shipments that are coming through the seaborne route, inventory piles up, indicating weaker final demand.

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Inventories down marginally

The SteelHome China Steel Price Index collects inventory data from 44 ports in China on a weekly basis. Iron ore port inventories are down marginally to 105.6 million tons for the week ended December 12. This figure is lower than in the preceding week, when inventory was 106.5 million tons.

Iron ore inventories at ports for the week ended December 12 were at levels 1.66 times those of November’s steel production. This ratio is often preferred over raw inventory figures because it measures how much inventory is available to keep current steel production activity going. The five-year average ratio is 1.49 times the steel production figures.

These elevated levels are partly attributable to lower steel production in China in November due to the APEC (Asia-Pacific Economic Cooperation) summit. We’ll discuss this in detail in the next part of this series. Inventory levels above the long-term average suggest bad news for iron ore companies, including Rio Tinto (RIO), BHP Billiton Limited (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF). Also affected is the SPDR S&P Metals and Mining ETF (XME).

Demand

Based on the data points for port inventory over the last few weeks, it’s evident that there is no significant fundamental improvement in the end demand for iron ore. However, inventories in recent weeks are showing signs of improvement. Higher inventories usually lead to lower prices for the additional incoming supply, as demand isn’t picking up at the same pace.

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