Iron-Ore Bear View of China Inventory Seen Overdone by Macquarie

Bearish interpretations of iron-ore stockpiles in Chinese ports are overdone, Macquarie Group Ltd. wrote in a report today, citing an analysis of inventory data at steel mills, ore miners and in ports.

While data show a “substantial rise” in port inventory, iron ore held by mills appears to be dropping, Macquarie said. Total iron-ore inventory in China is about 40 million metric tons lower than the last time port stocks of the raw material were at similar levels as today back in 2012, Macquarie said.

Iron ore prices have been falling as China’s economic growth slowed to the weakest since 1990, after companies including BHP Billiton Ltd. and Rio Tinto Group expanded capacity to meet surging steel demand. The price of ore with 62 percent iron content delivered to the port of Tianjin in China fell 11 percent this year to $119.40 a ton by yesterday.

“There has been a huge rise in the proportion of inventory mills are choosing to hold at port,” Macquarie wrote. “This, combined with a more moderate rise in trader inventory, seems to explain why port stocks look to have risen while the mills have been destocking.”

Macquarie said historical data show there has “often” been an inverse relationship between iron ore prices and the percentage of mill-owned stocks held in China’s ports, with mills holding more stock in port when prices are falling, and vice versa. When prices drop, the mills destock domestic ore “more aggressively” than seaborne ore, according to the bank.

Price Risk

“Given that the lead times on domestic ore can be very short, in a falling market mills prefer to pass the price risk up the chain to the miners rather than hold inventory themselves,” Macquarie wrote.

Stockpile reductions by Chinese mills this year were “almost entirely” compensated by rising inventory at mines and traders, according to the report. That makes the destocking different from the first half of 2013, when inventory at every point in the supply chain was falling, Macquarie said.

“With deliverable inventory higher, there would appear to be less potential for a squeeze in prices,” the bank wrote. “Our view that iron ore prices should rise in 2Q on the back of mill restocking hasn’t changed, but the risk of a squeeze pushing prices significantly higher is perhaps lower than we previously thought.”

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