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Could Chinese Port Inventories Decline amid Supply Tightness

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Supply disruptions and inventory

As the supply disruptions from the world’s two largest iron ore exporters, Brazil and Australia, have started showing in the export data, the fears of a supply crunch have gripped markets. This has led to a surge in iron ore prices. There is one variable, Chinese iron ore port inventories, that could act as a buffer as long as the temporary disruptions are not resolved.

China’s iron ore inventory

The inventories at China’s (FXI) ports show the balance between demand and supply. The ore that is not used up by the steel mills typically piles up at ports. While the port inventories in China have remained elevated in the last few years due to oversupply and waning demand, the picture might change going forward.

Decline in inventories

According to Commonwealth Bank’s mining and energy commodity analyst Vivek Dhar, “China’s iron ore port stocks have increased since February, but last week marked the first decrease in China’s iron ore port stockpiles in nearly two months.” He expects an “aggressive fall” in port inventories due to supply disruptions, particularly those from Vale SA (VALE).

Investors should note that the majority of port inventories are of lower grade iron ore. As supply tightens, Chinese steel mills should turn to inventories to fulfill their demand, which could increase the price of the lower grade iron ore in addition to that for the benchmark grade ore.

Higher iron ore prices should partially offset the decline in revenues that miners (XME) including BHP Billiton (BHP) and Rio Tinto (RIO) will experience due to lower production.

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