China’s port inventory
The iron ore inventory levels at Chinese ports can impact purchasing decisions. The inventory levels show the safety net and imbalance between the iron ore supply and steel mill demand. When the Chinese market (MCHI) rises, shipping stocks tend to rise as well. When the inventory levels are low, importers might restock. This encourages iron ore shipments. However, when the inventory levels are high, importers will likely postpone new orders.
Port inventory rises
After bottoming out at 79.4 million tons at the end of June, China’s iron ore port inventory started to rise. For the week ending November 13, the inventories were 86.5 million tons, according to data collected by SteelHome from 44 ports in China. This is a rise of 9% from the levels at the end of June.
Inventory levels impact dry bulk players
Building up the inventory leads to weak demand for iron ore because mills use up the stockpiled ore. This is probably why the Capesize index fell significantly in October and November.
Chinese steel mills are cutting back on the production due to record-low steel prices. In the face of strong shipments, this could lead to more data stockpiling on the ports. This will lead to weakness in the seaborne trade for iron ore. This could mean a short-term fall in the rates for vessels needed to transport iron ore from Australia, Brazil, and other seaborne export destinations to China. Mainly Capesize and Panamax vessels are used to transport iron ore.
This could have a short-term negative impact on the Guggenheim Shipping ETF (SEA). It would also be negative for dry bulk shipping companies including Navios Maritime Partners (NMM), DryShips (DRYS), Star Bulk Carriers (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.