U.S. Markets closed

Why low iron ore inventory may mean an upside for Capesize rates

Xun Yao Chen

Why China is important to the dry bulk shipping industry (Part 6 of 9)

(Continued from Part 5)

Iron ore inventory

Although steel output affects iron ore and coking coal imports, it’s important to know other factors that affect dry bulk imports. Iron ore inventory at Chinese ports reflects the safety net and the 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.

Steel manufacturers drew more iron ore than they replenished

Iron ore inventory at Chinese ports stood at 72.8 million mt (metric tonnes) on August 30, which is up from 71.08 million mt at the end of August, according to Antaike Information Development Company. The increase in inventory suggests steel manufacturers drew less than what traders imported over the past few weeks. But with strong steel output in August, this increase was likely driven by higher imports of iron ore rather than weakness in demand for the dry bulk.

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 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.

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. Although Capesize rates, the primary vessel that hauls iron ore and coal, have risen significantly in August, much upside remains if traders believe the price is right. This bodes positive for DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).

Continue to Part 7

Browse this series on Market Realist: