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Does Iron Ore Inventory Spell ‘Threat’ for Prices?

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Iron ore inventory surge

While the buying appetite for iron ore has increased in China, the country is still not able to completely absorb the supply. The increase of iron ore inventories above 100 million tons at ports bears testimony to this. It’s the first time that inventory has inched above 100 million tons in 2016.

Iron ore port inventories in China reached 100.5 million tons on May 20, 2016, and remained at 100.7 million tons on May 27, 2016. This is the highest level since March 2015.

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Inventory remains elevated

Iron ore inventories have increased 8.7% since the start of the year. This stock is enough to cover five weeks of Chinese imports. It also means that inventories aren’t being used up as quickly as they’re increasing.

The current inventory translates into an inventory-to-steel production ratio of 1.5x. This ratio is often preferred by analysts over raw inventory figures for tracking progress in the sector. The ratio measures how much inventory is available to keep actual steel production activity going.

The slowly increasing inventory at ports amid steel demand, which doesn’t seem sustainable, could hurt iron ore prices. That’s negative for iron ore players involved in the seaborne iron ore trade. These players include 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 5.0% of its holdings.

In the next part of this series, we’ll look at China’s steel production and demand outlook. This is vital to determine the outlook for seaborne iron ore prices.

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