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Iron Ore Inventories Soar to 2-Year High, Pressuring 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 are the highest sine 2014

Iron ore inventories at Chinese ports have reached a two-year high. For the week ended December 16, 2016, inventories stood at 111.6 million tons. That inventory level is the highest since September 2014. Inventories have risen 20.5% this year. The level translates to an inventory-to-steel production ratio of 1.6x.

An 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 a steel demand that doesn’t seem sustainable could hurt iron ore prices. The trend 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).

It’s worth noting that the SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. BHP makes up 5.0% of GNR’s portfolio holdings.

In the next part of this series, let’s 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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