China’s iron ore port inventory
China’s (MCHI) iron ore port inventory is a key indicator that reflects the supply and demand balance, as well as the safety net and imbalance between the iron ore supply and the steel mill demand.
Port inventory inching up
After bottoming out at 79.4 million tons at the end of June, China’s iron ore port inventory has started inching up. For the week ended December 18, inventories were 92.4 million tons according to the data collected from 44 ports in China by SteelHome. This is a rise of 11% in just over a month and translates into an inventory-to-steel production ratio of 1.5x. The ratio measures the amount of inventory available to keep actual steel production activity going. The current ratio is close to the last five-year average.
The ratio measures the amount of inventory available to keep actual steel production activity going. Additionally, the ratio is often preferred by analysts over raw inventory figures for tracking progress in the sector. The current ratio is close to the last five-year average.
Impact on iron ore miners
The rising inventory in the last month is most probably due to higher iron ore imports that weren’t used up by the steel mills. A weak steel production outlook could result in a further rise in port inventories.
The slowly rising inventory at ports—coupled with weak steel demand–is hurting iron ore prices. This, in turn, is a negative for the iron ore players involved in the seaborne iron ore trade, including BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and Cliffs Natural Resources (CLF). The SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. BHP forms 4% of its holdings.