Inventories decline nine weeks in a row
The SteelHome China Steel Price Index collects inventory data on a weekly basis from 44 Chinese ports (FXI). Iron ore inventories at these ports have been down for the last nine weeks. In the week ending June 12, iron ore port inventories were 85.4 million tons. This is a decline of 2.1% week-over-week. The inventory level is the lowest since November 2013.
This has led to a further decline in the inventory ratio to 1.19x the amount of steel production in April. In the week ending May 1, the ratio was 1.40x. Analysts often prefer this ratio to raw inventory figures for tracking progress in this sector. This ratio measures how much inventory is available to keep actual steel production activity going.
To put things into perspective, the five-year average ratio is 1.48x the amount of steel production.
Impact of lower inventory
Lower inventory usually causes steel mills to order more iron ore in order to keep the current level of steel production going. This should be favorable for iron ore companies involved in seaborne iron ore trade. These companies include Rio Tinto (RIO), BHP Billiton (BHP) (BLT), Vale SA (VALE), and Cliffs Natural Resources (CLF).
Investors need to consider this information along with other data trends, especially ones that show an increase in underlying demand. The drop in inventory levels could be a result of short-term factors. If the underlying demand remains weak, it might be negative for companies in the long term.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) has holdings in Rio Tinto, BHP Billiton, and Vale. Together, these companies account for 30.4% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metals and mining companies.