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Must-know: The impact of global iron ore imports and inventory

Khyathi Dalal

Must-know: An overview of Diana Shipping’s earnings (Part 8 of 9)

(Continued from Part 7)

Impact of global iron ore

With Brazil and Australia impacting the shipping industry, global iron ore imports and its inventory levels have a significant impact on companies like Diana Shipping (or DSX), DryShips (DRYS), Navios Maritime Holdings (NM), Safe Bulkers (SB), and Diana Containerships Inc. (DCIX). The Guggenheim Shipping ETF (SEA) tracks shipping companies.

Iron ore imports

According to Clarkson’s research, total world iron ore imports are expected to reach 1.31 billion metric tons in 2014—an increase of 10% compared to 2013. The 2014 import demand in China has been driven by the scheduled ramp-up of Australian iron ore output. For the first five months of 2014, total Chinese iron ore import increased 19% year-over-year (or YoY).

Iron ore port inventory

According to Commodore Research reports, at the end of June, 2014 iron ore stockpiles at Chinese ports remained at near record levels. They were more than 39% higher than the same time last year.

Chinese high iron ore stockpiles aren’t restricting Chinese iron ore imports. So far this year, firm import growth and a slow down in sea production growth have resulted in larger iron ore stockpiles of Chinese ports.

According to Chinese buyers, they have been buying cheaper iron ore from Australia and selling it to steel mills. The inventory at ports is still high.

Iron ore prices and impact on shipments

Led by the 30% decline in spot iron ore prices since the start of 2014, almost 90 of domestic iron ore miners have stopped producing their relatively low quality iron ore as a result of the prevailing low prices. An analyst at Commodore Research commented that it’s likely that during the second half of 2014, Australian and Brazil will increase their combined iron ore production by 50 million metrics tons.

This additional volume of shipped iron ore is estimated to require ~250 additional shipments from Brazil and Australia. It will lead to more iron ore being produced globally in the upcoming months. However, with the iron ore miners selling all the additional iron ore globally, the price of the commodity may collapse. This would create undesirable side effects for commodity traders and shippers. They have borrowed money to purchase and sell much more expensive iron ore. This might cause a large number of mines to become uneconomical to operate and lead to closure, especially in China.

In order to cut the default risks, China’s banking regulation has urged more checks in iron ore financing deals and stay back on trade loans. This suggests that these market norms are raised in order to remove many iron ore traders from the market during 2014 and beyond.

In the next part, we’ll discuss the Diana Containerships investment and outlook.

Continue to Part 9

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