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Is Cheaper Australian Iron Ore Displacing Chinese Production?

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Apr. 13 2015, Updated 11:06 p.m. ET

Port Hedland exports

Iron ore exports from Port Hedland, the world’s largest bulk exporting port, indicate the amount of iron ore that is leaving Australia for China and other destinations. Port Hedland Port Authority releases these figures each month.

This important indicator shows the ongoing supply from major iron ore players, including BHP Billiton (BHP), Fortescue Metals Group (FSUGY), and Atlas Iron.

Shipments through Port Hedland accounted for 55% of Australia’s total iron ore exports in 2013. More than 80% of the shipments from this port go to China. Rio Tinto (RIO) ships iron ore out of Cape Lambert and Dampier.

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Shipments to China rise

Iron ore exports from Port Hedland totaled 36.6 million tons in March 2015, an increase of 2.2 million tons, or 6.3%, from March 2014 levels. BHP Billiton (BHP) (BLT), Rio Tinto (RIO), and Fortescue Metals Group (FSUGY) all showed increased production in their quarterly reports in January. Volume growth from these players is showing itself in the increasing volume exports from ports.

Exports also rose month-over-month by 2.6%. The exports to China also increased by 3.3% month-over-month (or MoM) to 31.2 million tons. This is inline with efforts of big players to displace the domestic Chinese high cost iron ore capacity with relatively cheaper imports.

China’s iron ore consumption

China consumes two thirds of seaborne iron ore. Therefore, any uptick or weakness in Chinese demand mostly impacts iron ore companies that conduct seaborne trade. Any displacement of the high cost domestically is positive for players involved in the seaborne trade, which includes BHP, RIO, FSUGY, Vale (VALE), and Cliffs Natural Resources (CLF).

To take a broader approach toward investing in this sector, you can look at the SPDR S&P Metals and Mining ETF (XME). CLF forms 3.6% of XME’s holdings.

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