Despite strong demand from the steel industry, China’s iron ore inventories remain stubbornly high. At 157 million tonnes, stocks are slightly below the record high seen at the end of Q1, but they are well above the 136 million tonnes average observed throughout last year.
On the face of it, 157 million tonnes is very high but considering the structural changes that have been taking place in the Chinese iron ore market in recent years the stockpiles are much more manageable. We’ve discussed in the past that a significant portion of the stocks are of lower grade material (est. 40-60%) for which demand has weakened due to their less environmentally-friendly properties. We’ve also argued that stocks are reasonable compared to the high levels of imports.
However, there are two other factors which we believe justify holding high inventories. One is the increasing futures trade volumes, and the other is the growing blending activity at ports.
Iron ore futures have always been actively traded at the Dalian Commodity Exchange however in early May international investors were also allowed to buy and sell these contracts. These are physically delivered contracts meaning that traders with long positions need to be able to take delivery of iron ore and store it somewhere if they are still holding the contract at the end of the month. With rising trade volumes it is only natural to have high stockpiles.
Secondly, blending various grades of iron ore at Chinese ports have increased substantially in recent years and traders involved in such activities need to keep additional stocks as working capital. These practices have grown to such levels that Chinese traders are now exporting significant amounts of blended iron ore to other countries in the region.
All in all, we are not overly concerned about the stockpile levels at Chinese ports. At least for the time being anyway…
Sources:Arrow
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