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 raw materials, and vice versa.
Inventories are rising slowly
While iron ore inventories have fallen somewhat from the high at the end of July, they’re still very high by historical standards. Inventories for the week ended September 23, 2016, totaled 102.9 million tons. The current inventory translates to an inventory-to-steel production ratio of ~1.6x. 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 steel production activity going.
Ever-increasing inventory at ports in the midst of a steel demand that doesn’t seem sustainable could hurt iron ore prices. This is negative for iron ore players involved in the seaborne iron ore trade, including 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 the outlook for China’s steel production and demand. Production and demand are vital in order to determine the outlook for seaborne iron ore prices.