Tracking 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. This would encourage iron ore shipments. However, when inventory levels are high, importers will likely postpone new orders.
Inventories are more or less steady
The SteelHome China Steel Price Index collects inventory data on a weekly basis from 44 ports in China (FXI).
The iron ore port inventories have been more or less steady. For the week ending August 14, inventories were 81.5 million tons.
This translates into an inventory-to-steel production ratio of 1.23x. This ratio is often preferred by analysts over raw inventory figures for tracking progress in the sector. It measures how much inventory is available to keep the actual steel production activity going. To put things into perspective, the five-year average ratio is 1.48x the amount of steel production.
Inventory levels impact dry bulk players
Recently, inventories at ports have been rising. This might be due to steel production being brought forward as steel mills temporarily shut down in September for the military parade and the 2015 World Championships in Athletics. Rising iron ore shipments from Australia and Brazil have led the Capesize rates to beat the overall dry bulk sector in recent months. Going forward, weak steel demand might lead to falling shipments. 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 Navios Maritime Partners (NMM), Star Bulkers (SBLK), 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 more detail.