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How a Large Iron Ore Port Inventory Will Impact Prices

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China’s iron ore port inventory

China’s (MCHI) iron ore port inventory is a key indicator that reflects the commodity’s supply and demand balance. It also indicates the safety net and imbalance between iron ore supply and steel mill demand.

High inventory is a sign of weak demand for the raw material, and vice versa.

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Inventory remains elevated

Iron ore inventories have risen by 14% since the start of 2016 and by 4% in the last month. Inventories for the week ended July 22, 2016, were 105.6 million tons. This was the highest level since December 2014. It also meant that inventories weren’t being used up as quickly as they were increasing.

The current inventory translates to an inventory-to-steel production ratio of 1.52x. 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.

Ever-increasing inventory at the ports amid steel demand that doesn’t seem sustainable could hurt iron ore prices. This is negative for iron ore players involved in seaborne iron ore trade. Such players include BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (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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