Key indicators you should watch out for in the iron ore industry (Part 8 of 11)
Chinese iron ore imports are up year-over-year
Chinese customs data tracks iron ore imports in China. Tracking this data is important for investors since it gives you a good sense into the direction of the appetite for imported ore for Chinese mills and traders—who consume about two-thirds of total seaborne iron ore.
Chinese iron ore imports for July came in at 82.5 million tons. This is 11.0% higher than the previous month.
The data shows that iron ore imports for the first six months of the year have increased by 19.0% compared to the same period last year. Imports from Australia have risen by 33.3% and those from Brazil by 14.5%. Low prices are driving sales despite weaker domestic steel demand growth.
Imports are rising despite weaker steel demand
Chinese iron ore imports should either be stable or higher going forward, adjusted for seasonal fluctuations. There are a few factors driving this outlook.
Property rules are relaxed and the government is providing stimulus to support the property market, which started cooling off recently. We’ll talk more about that in a later part of this series.
Low-cost iron ore from Australia and Brazil is displacing high-cost Chinese domestic iron ore production. This should also support the outlook for imports.
Wood Mackenzie estimates that 80 million tons of domestic production in China could close due a to sustained iron ore price fall. Also, China’s environmental regulations might force the country to rely more on high-quality imported ore rather than using more polluting processes to refine low-quality domestic ore.
Impact on companies
Domestic Chinese production shutting off and increasing in imports would benefit volumes of companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF) since all of them are involved in the seaborne trade.
A broader approach to participating in this trend without picking individual companies would be looking at the SPDR S&P Metals & Mining ETF (XME).
Browse this series on Market Realist:
- Part 1 - Key indicators you should watch out for in the iron ore industry
- Part 2 - Why iron ore port inventory is marginally lower at Chinese ports
- Part 3 - Why iron ore exports at Port Hedland hit a record high in July