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Elevated Iron Ore Inventories: The Trouble Won’t End for Miners

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Jul. 24 2017, Updated 8:09 a.m. ET

China’s iron ore port inventory

China’s iron ore port inventory shows the steelmaking commodity’s (GNR) demand and supply balance. It also measures the imbalance between supply and steel mill demand. High inventory levels usually mean weak demand for raw materials, and vice versa.

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Inventories remain elevated

Inventories at Chinese ports have been inching higher to hit one record after another. This scenario has been a major worry for iron ore miners. While in recent weeks, inventories have fallen slightly from their record high of 141.5 million tons on June 23, 2017, they remain high. Currently, inventories are close to 139 million tons.

According to Macquarie Bank, iron ore inventories have been inching up in 2017 despite strong demand. The bank believes this trend “clearly represents some degree of excess supply.”

The inventory-to-steel production ratio now stands at 1.92x. To put this ratio in context, its average for the last five years has been closer to 1.46x. So, along with absolute values, inventories remain elevated in relation to production.

Analysts often prefer this ratio over raw inventory figures in tracking the progress in the sector. This ratio measures how much inventory is available to keep steel production activity going.

Effect on iron ore prices

Climbing iron ore inventories at Chinese ports amid rising supply and demand that isn’t expected to keep up with supply is expected to hurt iron ore prices. This trend doesn’t bode well for seaborne iron ore players such as Rio Tinto (RIO), Vale (VALE), BHP (BHP) (BBL), and Cliffs Natural Resources (CLF).

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