Key indicators you should watch out for in the iron ore industry (Part 2 of 11)
Iron ore port inventory
The iron ore port inventory is a key indicator. It shows you the demand appetite of steel mills. If steel mills are continuously demanding iron ore, then inventory won’t stack up at the port. On the other hand, if mills aren’t using up all the shipments that are coming through the seaborne route, they’ll pile up. This would show weaker final demand.
Rising inventories in the last six months have led to prices falling ~29% this year.
What does the data say?
Iron ore port inventories fell for the third consecutive week and came to 111.55 million tons for the week ended August 1. This compares to a figure of 111.95 million tons last week and 113.60 million tons the week before, according to the data tracked at 44 ports in the country by SteelHome.
Inventories have started inching lower in recent weeks. But they still remain at quite high levels compared to the long-term average. They’re still near the record levels of 113.7 million tons reached in early July.
A recent clearing of inventories shows a trend of steel mills picking up inventories from ports, which is $4 to $5 per ton cheaper than fresh supply. So it’s just a short-term trend. It doesn’t show any marked improvement in iron ore appetite from mills.
Outlook for stocks
The upside based on this data remains limited in the near term. It doesn’t show any fundamental improvement and inventories are still close to all-time highs.
Higher inventories would lead to lower prices for the additional supply coming in. Demand isn’t picking up at the same pace, so pressure should remain on iron ore prices and iron ore stocks.
So a buildup of inventories at Chinese ports is a negative indicator for the performance of stocks like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF) as well as ETFs like the SPDR S&P Metals & Mining ETF (XME).
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