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Iron Ore Port Inventories Hit another Record High as Discounts Rise

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Jan. 3 2018, Updated 9:01 a.m. ET

China’s iron ore inventory

The inventories at China’s ports show the balance between demand and supply. The ore that is not used up by the steel mills typically piles up at ports.

Rising inventories lead to a conclusion that demand in the country is weak and vice versa. Because this indicator helps provide a sense of the direction of iron ore prices, it is important to keep track of it.

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Inventories inching up

In 2017, iron ore port inventories have remained high almost all year long. According to the latest weekly data available, the port inventories reached ~143.6 million tons. This is the highest level of inventories since the records began in 2004.

As the winter cuts in Chinese steel production have come into effect, production has slipped. The demand also declines during winter months. Moreover, the Chinese mills have started demanding more high content iron ore. This has led to the swelling of low content iron ore at the ports.

According to the Chinese Iron and Steel Association (or CISA), the “Chinese iron ore port inventories will continue rising due to the ongoing steel output cut and slower appetite from steel mills which have finished restocking.”

As pointed out by the CISA, the steel mills have mostly completed through the restocking cycle for now. This could mean a further pressure on demand, resulting in increasing inventories. This, in turn, doesn’t bode well for the iron ore prices in general. The high-grade iron ore, however, could still continue to elicit demand as mills shift to higher-grade material to reduce pollution.

Effect on iron ore prices

Miners (GNR) producing high-grade ore—such as Rio Tinto (RIO), Vale (VALE), and BHP (BHP)(BBL)—are enjoying higher premiums. Cleveland-Cliffs’s (CLF) Asia-Pacific division and Fortescue Metals Group (FSUGY) produce relatively low-grade iron ore, thereby attracting discounts.

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