Why the Long-Term Outlook on Iron Ore Prices Is Still Negative
China’s port inventory
China’s (MCHI) iron ore port inventory is a key indicator that reflects the supply and demand balance, as well as the safety net and imbalance between the iron ore supply and the steel mill demand.
Declining port inventory
China’s iron ore port inventory has been declining consecutively for the past five weeks. For the week ending September 11, inventories stood at 80.05 million tons, according to the data collected from 44 ports in China by SteelHome. This is a decline of 3% from the levels at the end of July.
This translates into an inventory-to-steel production ratio of 1.22x. Often preferred by analysts over raw inventory figures for tracking progress in the sector, this ratio measures how much inventory is available to keep actual steel production activity going. To put things into perspective, the five-year average ratio is 1.47 times the amount of steel production.
Lower inventory level leads to more demand for iron ore to build up the stocks to be later used by the steel mills. Though iron ore prices have fallen by 18% year-to-date, they are still holding up in the last few months mainly due to the strength of restocking demand.
This in turn is a short-to-medium-term positive for the iron ore players involved in the seaborne iron ore trade, including BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (VALE), and Cliffs Natural Resources (CLF). The SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. BHP forms 4.95% of its holdings.
In the next part, we’ll explore iron ore imports in China, which gives a directional sense about the appetite of steel mills. This should give a clue as to whether the port inventories will be used up or continue to build in the face of high shipments.
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