Iron Stockpiles Hit Record in China as Quality Gets Scrutiny

  • Port holdings have surged more than 22 million tons this year
  • Barclays sees drawdown when steel demand starts to slow down

Iron Ore Prices Down 31% Since March

The record heap of iron ore on China’s doorstep just got even bigger, with the increase in holdings so far this year eclipsing the build up seen over all of 2016 as mills produce unprecedented amounts of steel.

Stockpiles at ports rose 1.3 percent to 136 million metric tons, expanding for a fourth week, according to Shanghai Steelhome E-Commerce Co. So far in 2017, they’ve risen 22.05 million tons, surpassing the 20.85 million added last year.

Iron ore has stabilized in the $60s in recent weeks after sinking in March and April on concern rising global production will top demand. The port holdings are one sign of ample supplies, and miner BHP Billiton Ltd. has cited them among risk factors that may tug prices lower even as it remains positive on the outlook for steel production. Mills in China made a record amount in April.

“Stockpiles are high, but what matters more than the absolute volume” is the quality, said Dane Davis, an analyst at Barclays Plc. “When steel demand is running hot, high volumes of stockpiles don’t matter, as they are lower-quality ores and not needed at the moment. However, when steel demand slows from high production volumes, then stockpiles matter, and matter fast.”

The raw material with 62 percent content in Qingdao, China was at $63.19 a dry ton on Monday, extending its run in the $60s since mid-April, according to Metal Bulletin Ltd. Prices, which hit a 30-month peak of $94.86 in February, posted double-digit losses in March and April and are 20 percent lower this year.

Ore comes in different grades, according to purity of content, with 62 percent used as a benchmark. When steel demand is robust and mills’ margins are strong, producers may favor higher-grade ore to maximize output. Higher prices of coke -- which is made from coking coal and fed into furnaces to produce iron and remove impurities -- may also boost a preference for better-quality ore.

‘Greater Preference’

“We expect a greater preference for lower-quality ores in the coming months, and that should begin the reduction in iron ore inventories,” New York-based Davis said in an email. While it remains possible that port holdings may go on to hit 150 million tons this year, it’s unlikely as the market for steel will cool before that happens, he said.

Iron ore imports by China increased 8.6 percent to 353 million tons in the first four months from a year ago, according to customs data. The port holdings are above the five-year average of about 97 million tons, and are now large enough to cover about seven weeks’ of imports.

The bulk of the ore at the ports is lower grade and, following a recent slump in coking-coal prices, mills’ preference will probably shift toward this, and away from high-grade material, according to Axiom Capital Management Inc.’s Gordon Johnson. “As this dynamic takes hold, we expect iron ore prices to sharply correct lower,” Johnson said in an email.

At present in China, mills prefer higher-quality ore to improve steel output, Deutsche Bank AG said in a May 19 report after analysts took a local tour. The bank estimated as much as 39 percent of the port holdings are lower-grade material, without giving a comparison for earlier periods, and predicted iron ore will slump to $50 in the final quarter as supply exceeds demand.

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