The Canary in the Iron Ore Mine

Noted Australian economist Alan Kohler has made a very interesting observation about the withering green shoot of a massive iron ore oversupply developing in China.

This backs up my belief that this is just a restocking of metals and divestment of $US by China at the market low in March, when we saw record low commodity prices and $US strength combine for a China buying spree of epic proportions and the catalyst of the commodities (and stocks) bear market rally.

Here is an excerpt from the article published Tuesday on Business Spectator.

A Green Shoot Withers

There seems to be a colossal iron ore arbitrage going on in China.

According to a Reuters report a few days ago, and then another yesterday from ANZ’s head of commodity research, Mark Pervan, there are currently 80 bulk ships waiting off China to unload iron ore. That’s 10 per cent of the global Capesize vessel fleet.

A huge spike in demand for iron ore from China has, in turn, pushed the Baltic Dry bulk shipping rates index up 200 per cent since early April. The Baltic Dry index is a composite of four indices, of which the Capesize index has seen the biggest rise – up 315 per cent.

This in the midst of a global recession. The iron ore shipments are simply not supported by any underlying increase in demand for steel. Steel production in China was relatively strong in May – an annual rate of 544 million tonnes, compared to 500 million in 2008 – but steel inventories are also rising rapidly. Exports are still falling, albeit at a slower rate, and underlying steel demand is weak.

Comments

[Larry House:]

Thanks for a useful heads up.

Jun 10 11:22 AM

[HaavBline:]

The Chinese may be stocking commodities expecting their stimulus program will succeed in waking up domestic demand and the transformation to a domestic growth model, rather than strictly preparing for a recovery of export markets.

But, it iron has indeed been overstocked, it would be very tempting to SHORT Rio Tinto.

Jun 10 01:06 PM

[Chandragupta:]

Interesting data, but difficult to draw any inference from it. Are you trying to say that ore shipments will taper off soon? May be, since demand is not picking up, as you have pointed out. But then, may be not. China is a big enough country, and this stock piling may go on and on.....who knows? Better pile up iron ore (and copper, and oil, and so on) than piling up dollars.

Jun 10 01:18 PM

[optionsgirl:]

Is this the ore purchased by China in late 2008 and early 2009 at re-negotiated 2007 prices?

Jun 10 02:16 PM