uploads///Iron ore inventory

The Gap between Iron Ore Port Inventories and Commodity Prices

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Feb. 27 2018, Updated 7:31 a.m. ET

China’s iron ore inventory

Iron ore port inventories in China reflect the balance between demand and supply. Usually, if the iron ore isn’t used up by steel mills, it piles up at ports. Therefore, increasing inventories reflect 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 track.

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Inventories hit a record-high again

Iron ore port inventories remained high throughout most of 2017, and they remain elevated in 2018 as well. Despite high port inventories, iron ore prices remained firm and even picked up the pace toward the end of the year. The most likely reason for this anomaly was the stockpiling of lower-grade iron ore imports. To control pollution as directed by authorities, Chinese mills switched from lower-grade ore to higher-grade ore. This shift resulted in stockpiling lower-grade material at ports. Still, higher inventories tend to pressure prices.

In 2017, inventories hit a record many times. According to the latest data from SteelHome, inventories 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 threaten prices.

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.

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