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Iron Ore Inventories Have Started Dropping Gradually

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China’s iron ore inventory

The iron ore inventories at Chinese ports determine the supply and demand balance for steelmaking commodities (GNR). The inventory level 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 easing

The inventories at Chinese ports have started dropping. For the week ended September 15, 2017, the inventories fell for the seventh consecutive week to 131.9 million tons. According to the data collected by SteelHome, this is the lowest level since mid-April. The easing of inventories is a positive indication, meaning that mills have started consuming iron ore from stockpiles. However, the Chinese steel mills were still consuming higher grade iron ore that was purchased directly from the seaborne iron ore miners or domestically. Since the stockpiles are usually of low to medium grade ore, the stockpiles kept on getting bigger.

This was the reason that for the last couple of months, iron ore prices were increasing despite higher inventories at the ports. Amid high steel prices and higher margins, Chinese steel mills were demanding higher grade ore to produce steel more efficiently and reduce pollution. Chinese authorities are coming down heavily on units with high pollution outputs.

Effect on iron ore prices

While the overall trend of falling inventories should benefit all the iron ore producers, the shift of Chinese mills to higher grade materials should proportionately benefit larger miners more. Miners such as Rio Tinto (RIO), Vale (VALE), BHP (BHP) (BBL), and Cleveland-Cliffs (CLF) produce high-grade iron ore. Other producers such as Fortescue Metals Group (FSUGY) and Atlas Iron have relatively lower grade iron ore.

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