China’s iron ore inventory
Iron ore port inventories in China reflect the balance between demand and supply. Usually, if iron ore isn’t used up by steel mills, it piles up at ports. Therefore, increasing inventories indicate 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.
Inventories still at elevated levels
According to Mysteel, iron ore inventories at Chinese ports eased by 731,600 tons to 160.4 million tons last week. While the latest data shows that inventories have eased, they are still close to record highs. We will have to wait to see if this easing is the beginning of a trend or just a one-off.
Investors should also keep in mind that while inventories have remained elevated for a long time, iron ore prices have remained firm, most likely due to the quality of the ore available at the ports. Most stockpiles are of lower-grade material.
To control pollution as directed by authorities, Chinese mills switched from lower-grade ore to higher-grade ore. The shift resulted in the stockpiling of lower-grade material at ports. However, things are now changing. As iron ore prices and steel margins are coming under pressure, Chinese steel mills could again start demanding lower grade materials, which are in abundance at ports, pressuring prices further.
Effect on iron ore prices
If selling pressure on iron ore prices persists, miners (GNR) producing iron ore, including 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 low-grade iron ore and could be pressured due to higher discounts.