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Chinese Iron Inventory Glut Threatens Prices

Chinese Iron Inventory Glut Threatens Prices

Iron ore’s see saw pattern this year is unlikely to end soon as news of a glut in China could have a negative effect on prices.

Hong Kong, July 04, 2016 — Despite a seven-year decline in China’s growth rate from 13 to 7 per cent, the iron ore inventory is close to the record 110 million metric tonnes, reached in 2014. That crest came before a 1 year drop to 80 million tonnes that tanked prices to a record low of $US34 a tonne in 2015.

The resource, an essential ingredient in steel, has seen major fluctuations in the first quarter after an initial move by Chinese investors into futures for raw materials totally changed direction following new regulator rulings. While steel facilities on the mainland were earnestly producing record daily production last month to benefit from a steel price jump, output in the first 3 months was 2.6 percent lower than last year. BHP Billiton Ltd., an Anglo-Australian multinational mining metals and petroleum company, predicted this week that the glut may continue.

Gary Chambers, Chief Investment Officer and Director of Corporate Trading at Fidea Wealth Management had the following to say, “We are actually fairly certain that the demand for steel will jump. China’s economy has been through the wringer lately and that may have an influence, but we are still recommending a long position on iron. China has a lot of iron ore now. Is it too much? Time will tell.”

In order to feed the world’s biggest steel industry, China has imported a massive 950 million tonnes last year equivalent to about 18 million tonnes a week. Customs reports show that imports gained nearly 5 percent to over 80 million tonnes in May compared to the same month in 2015. All this resulting in a price decline of over 20 percent compared to April when prices peaked at $65 per ton.

Experts’ fear that continued over importation will get even worse in 2016, which will only hurt prices further, maybe even forcing the raw material down to $35 by the end of the year. Data from major supply countries like Australia show imports are accelerating at a rapid rate.

Gary Chambers added “I don’t see any slowdown in iron imports this year. This glut looks long term and China is not going to be outputting steel fast enough to affect things. We are looking at stockpiles massively exceeding demand growth; however, we remain optimistic steel demand will peak next month.”

Kazuko Rei
Fidea Wealth Management
Tokyo, Japan


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