Tracking China’s port inventory
China’s iron ore port inventory is a key indicator that reflects the supply and demand balance. It reflects the safety net and the imbalance between the iron ore supply and the steel mill demand. When steel mills continually demand iron ore, inventory doesn’t build up at the port.
However, if mills don’t use up the shipments that are coming through seaborne routes, inventory piles up, indicating a weaker final demand.
Inventories decline for 10 straight weeks
The SteelHome China Steel Price Index collects inventory data on a weekly basis from 44 ports in China (FXI). Iron ore inventories at these ports have been declining for the last ten weeks. In the week ending June 19, iron ore port inventories stood at 80.3 million tons, a decline of 2.1% week-over-week.
This inventory level is the lowest since November 2013. This translates into an inventory-to-steel production ratio of 1.15x, compared with 1.40x at the start of May. The five-year average ratio is 1.48x the amount of steel production.
Declining inventories are positive for iron ore miners
Inventory has come down in recent weeks, which should prompt steel mills to order more iron ore. This should be favorable for iron ore companies at least in the short term. The medium-term to long-term outlook still depends on the pickup of underlying demand. The impacted companies are mainly the ones involved in seaborne trade:
The iShares MSCI Global Metals & Mining Producers ETF (PICK) has holdings in Rio Tinto, BHP Billiton, and Vale. Together, these companies make up 31.4% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metals and mining companies.