China’s iron ore inventory
Inventories at China’s ports reflect the balance between demand and supply. The ore that isn’t used up by steel mills typically piles up at ports.
Rising inventories lead to the 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’s important to keep track of it.
Inventories hit a record-high again
Iron ore port inventories have remained high almost throughout 2017. Despite this performance, iron ore prices picked up their pace toward the end of the year. The most-cited reason for this anomaly was the stockpiling of lower-grade iron ore imports, as Chinese mills switched from lower-grade ore to higher-grade ore in a bid to control pollution. Still, higher inventories tend to pressure prices.
In 2017, inventories hit a record many times. According to the latest data from SteelHome, inventories have hit another record high of 154.3 million tons. This high implies growth of 30% year-over-year (or YoY) in inventories. According to ANZ, this growth implies approximately 50 days of imports.
Analysts have started worrying that iron ore stockpiles that are enough to produce 107 million cars could pose a threat to prices.
Record stocks have already started pressuring prices. The most active May delivery contract on the Dalian Commodity Exchange fell 4.8% on January 23. According to the Chinese Iron and Steel Association (or CISA), iron ore supplies continue to rise with port stocks testing record highs. With oversupply continuing, there’s no foundation for iron ore prices to sustain gains.
Effect on iron ore prices
If the selling pressure on iron ore prices persists, miners (GNR) producing iron ore—such as Rio Tinto (RIO), Vale (VALE), and BHP (BHP)(BBL)—could also come under pressure. Cleveland-Cliffs’s (CLF) Asia-Pacific division and Fortescue Metals Group (FSUGY) produce relatively low-grade iron ore. These miners could come under increased pressure due to higher discounts.