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Why Miners Are Worried about Iron Ore Inventory at Ports

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China’s iron ore port inventory

China’s iron ore port inventory 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.

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Highest inventories since 2004

Iron ore inventories at Chinese ports have already risen 18% YTD (year-to-date) in 2017. Port inventories stood at 134 million tons on March 24, 2017, the highest level since 2004. This inventory level translates to an inventory-to-steel production ratio of 2.0x.

Analysts often prefer an inventory-to-steel production ratio over raw inventory figures for tracking progress in the sector. The production ratio measures how much inventory is available to keep steel production activity going. The average for this ratio over the past five years is near 1.5x.

Negative fallout expected

Increasing inventories at ports amid steel demand that doesn’t seem sustainable could hurt iron ore prices. This trend will be negative for iron ore players involved in the seaborne iron ore trade like 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 makes up 5.0% of GNR’s portfolio holdings.

Production and demand are vital in determining the outlook for seaborne iron ore prices. In the next part of this series, we’ll look at the outlook for China’s steel production and demand.

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