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Iron Ore Inventories Stay Near Record Highs: Could Prices Cave?

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May. 31 2018, Updated 1:35 p.m. ET

China’s iron ore inventory

In this article, we’ll look at China’s iron ore port inventories and what they suggest for iron ore prices. These inventories reflect the difference between demand and supply. Usually, if iron ore isn’t used up by steel mills, it piles up at ports. Therefore, increasing inventories reflect weak demand, and vice versa.

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Inventories near record high

Analysts have been warning for a long time that record iron ore inventories at Chinese ports could weaken iron ore prices. While this weakness didn’t materialize consistently over a few months, it is starting to show now. According to SteelHome, inventories have stayed near the record high of 161.7 million tons reached in April. Last week (ended May 25), the inventories stood at 160.6 million tons.

Earlier, prices were firm despite increasing inventories because most of the stockpiles were lower-grade material. To control pollution as directed by authorities, Chinese mills switched from lower-grade ore to higher-grade ore, resulting in lower-grade material stockpiles at ports. Now, however, things are changing. As iron ore prices and steel margins are coming under pressure, Chinese steel mills could again start demanding lower-grade materials, which could pressure prices.

Effect on iron ore prices

If the selling pressure on iron ore prices persists, iron-ore-producing miners (GNR), 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 (FSUGY) produce low-grade iron ore. These miners could come under increased pressure due to larger discounts.

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