Why track China’s port inventory?
Iron ore inventory levels at Chinese ports can impact purchasing decisions because they reflect the safety net and the imbalance between iron ore supply and steel mill demand. When the Chinese market rises, shipping stocks tend to rise as well. When inventory levels are low, importers may restock, which would encourage iron ore shipments. However, when inventory levels are high, importers are likely to postpone new orders.
Inventories fall for nine weeks in a row
The SteelHome China Steel Price Index collects inventory data on a weekly basis from 44 Chinese ports (MCHI). After declining for 11 consecutive weeks, port inventory has started inching up recently. Iron ore inventories increased for two consecutive weeks to reach 82.35 million tons as of July 10.
This translates into an inventory-to-steel production ratio of 1.18x. Often preferred by analysts over raw inventory figures for tracking progress in the 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 inventory on dry bulk players
Increasing shipments from Australia and Brazil on the one hand and waning demand from China on the other are resulting in a stockpiling of inventories. This could mean lower volumes being ordered in the future.
That would have a negative impact on the Guggenheim Shipping ETF (SEA). It would also be negative for dry bulk shipping companies including Diana Shipping (DSX), Golden Ocean Group (GOGL), and Scorpio Bulkers (SALT).
Investors can also consider the SPDR S&P Metals and Mining ETF (XME) for exposure to the diversified metals space.
China’s import volumes drive the dry bulk shipping industry. In the next part of this series, we’ll look at this in greater detail.