Why low iron ore stock at Chinese ports is good for shipping rates

Market Realist

Dry bulk shipping advice and updates, September 13–25 (Part 7 of 11)

(Continued from Part 6)

Iron ore inventory

Iron ore inventory is one of several measures that affect iron ore imports and shipping rates. The iron ore inventory at Chinese ports reflects the safety net and imbalance between iron ore supply and steel mill demand. When inventory levels are high, they reflect possible over-purchases by importers, which may prompt importers to cut back on imports in order to lighten up inventory in the near future. On the other hand, when inventory levels are low, importers may restock, which will aid iron ore shipments.

China Iron Ore Inventory 2013-09-25

Inventory remains low despite rising shipments

Iron ore inventory at Chinese ports stood at 69.8 million mt (metric tonnes) on September 20, which is down from 7.28 million mt at the end of August, according to Antaike Information Development Company. The drop suggests steel manufacturers drew more iron ore than traders imported over the past few weeks, which is positive when iron ore imports are rising.

Inventory levels have been falling since September 2012, as importers tried to lighten up inventory despite a pick-up in industrial activity in mid-2012. Before the decline, inventory levels had risen close to 100 million mt, as importers took advantage of falling commodity prices in late 2011 even though growth was starting to deteriorate.

Inventory to Production Balance 2013-09-10

Inventory-to-production near five-year lows

Port inventory as a percentage of monthly crude steel production, which is the preferred indicator since it shows how much iron ore is readily available based on current output, rose from 109% for July to 110%, showing a slight increase. Yet the current level remains significantly below the historic average of ~145%.

As imports’ shares of iron ore supply in China have gradually increased from 2006, low inventory serves as a cushion for stable iron ore shipments if crude steel production falls from here. On the flip side, traders could import more iron ore, given appropriate prices, if steel production continues to grow at a stable rate. Let’s see how this indicator changes when China reports its September steel production data in the first week of October.

Support and further upsides

The indicator will act as a support in weak economic conditions and show possible further upsides in iron ore shipments when economic growth is healthy. This bodes positively for DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) over the medium to long term.

Continue to Part 8

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