In Port News 15/07/2016
At hulking ports along China’s coast, iron ore is piling up. At the same time, the price paid for iron ore in China, shipped from countries such as Australia and Brazil, is at its highest level in months.
That disconnect has many traders and analysts questioning whether the value of the steelmaking ingredient is headed for a fall.
This week, the spot price of iron ore climbed as high as $58.80 a metric ton, its most expensive since early May and up 37% from where it started the year. Over the same period, stockpiles at Chinese ports have swelled by 13%, to 104.5 million tons, their highest since December 2014, and are creeping back toward that year’s all-time high, according to Shanghai Steelhome Information Technology Co., a market information provider.
Port inventories of iron ore, one of the world’s most traded commodities along with oil, are a closely watched measure of how much excess raw material might be washing around in the market. The iron-ore trade, which was long dominated by a small number of major buyers and sellers agreeing deals in closed-door negotiations—and where a derivatives market remains in its infancy—doesn’t have the same wealth of data available compared with commodities such as copper and gold, or even oil, another market awash with supply.
U.S. oil prices fell to a two-month low this week after federal data showed U.S. inventories of crude oil and refined products are at a record high.
High inventories can signal weak physical demand and many in the iron-ore market including Nev Power, CEO of world’s No. 4 exporter Fortescue Metals Group Ltd., point to moves in China’s port stockpiles when evaluating surpluses or shortfalls.
Finding ways of understanding where prices could be headed is arguably increasingly crucial as companies navigate a prolonged and extremely volatile downturn. That is the case across many commodities markets including oil and copper, although it is particularly pertinent in iron ore where trading data is sparse and surveys are relied on heavily.
“The port stocks are very visible,” said Paul Gray, iron-ore analyst at consultancy Wood Mackenzie. “They are one of the few indicators people can see very easily.”
When China’s port inventories surged to their highest recorded level in 2014, above 113 million tons, iron-ore prices began a sharp slide that would push the market lastingly below $100 a ton for the first time in years.
Over the course of the prior year, the price had slipped 7%, while stocks ended 4% higher. Conversely, in 2012, prices rose and stockpiles fell.
“It’s reality that when the port stock rises, a drop is seen in iron-ore prices,” said Karun Mittal, a marketing manager at Welspun Steel Ltd. in India. “At this time,” though, he said, “we observe a different attitude.”
Instead of fretting about the swelling stocks, traders are focused on their calendars: For the rest of this month, there will be restrictions on steel production in the steelmaking hub of Tangshan, in China’s Hebei province, to clean the air for a memorial in the area to the victims of the deadly earthquake in 1976.
That has helped to push Chinese steel prices higher, suggesting the country’s steelmakers are now more profitable and consequently able to keep more furnaces running.
A drop in stockpiles of finished steel and speculation about more stimulus in China have also been given as reasons for iron ore’s recent strength.
Certainly, there isn’t always a clear connection between prices and how much dirt sits at China’s ports. Iron ore surged to a 15-month high in April as speculators turning away from stocks poured billions of dollars into Chinese iron-ore futures, bidding up prices even at a time when stockpiles at the country’s ports were rising sharply.
Some say the much-examined signal doesn’t send a clear message.
“I don’t read the current accumulation of inventories as something immediately bad for the price of iron ore,” said Georgi Slavov, head of iron ore and shipping research at commodities broker Marex Spectron. The buildup could be a result of a bottleneck in the overall supply chain or traders storing stocks because they expect prices to rise, he and others said.
Still, bloated stockpiles worry many.
Macquarie says it is skeptical prices will hold at this multi-month high for long, given that high port stocks have emerged at a time of softer oil prices and flat-to-lower steel output. China’s crude steel output was down 1.4% year over year in the first five months of 2016.
Commonwealth Bank of Australia forecasts prices to fall back to $40-$45 a ton in the second half of the year. Weaker prices would be good for steelmakers, but cut into the profits of iron-ore producers.
Even Mr. Slavov said that, although he’s confident of robust demand for ore, rising mine production from new and expanded operations could cause the price to swing lower. “We will never forget that we are in a well-supplied market,” he said.
