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Port Inventories Reach High, Spell Trouble for Iron Ore Prices

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China’s iron ore port inventory

China’s (MCHI) iron ore port inventory, a key indicator, reflects the commodity’s supply-and-demand balance. It also indicates the safety net and imbalance between the iron ore supply and steel mill demand. A high inventory is a sign of weak demand for raw materials, and vice versa.

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Inventories highest in two years

While iron ore inventories started falling after reaching a high in July, the latest data point reveals that they’ve started inching up again. For the week ended November 18, 2016, inventories stood at 110.6 million tons. This inventory level is the highest since September 2014, and the inventory has risen by 19% this year. Also, this level translates to an inventory-to-steel production ratio of ~1.6x.

This inventory-to-steel production ratio is often preferred by analysts over raw inventory figures for tracking progress in the sector. It measures how much inventory is available to keep steel production activity going. The average for this ratio over the last five years is close to 1.5x.

Negative for iron ore

Increasing inventories at ports, amid steel demand that doesn’t seem sustainable, could hurt iron ore prices. This trend is negative for 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).

Notably, the SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index, and BHP makes up 5.0% of GNR’s portfolio 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 determining the outlook for seaborne iron ore prices.

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