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Chinese Iron Ore Stockpiles Rise To Record As End Demand Plummets

Tyler Durden's picture




 

It may not be one of the core three (somewhat) realistic and accurate econometric indicators of China's economy (which as a reminder according to premier Li Keqiang are electricity consumption, rail cargo volume and bank lending), but when it comes to getting a sense of capacity bottlenecks in China's fixed investment pipeline - be it in ghost cities or the latest skyscraper building spree - nothing is quite as handy as commodity, and particularly iron ore (if not copper, which as we have explained before has a far more "monetary/letter of credit" function in China's markets), stockpiles at China's major ports. The logic is simple: no stockpiles means end demand by steelmakers is brisk and there is no inventory build up which in turns keep Australia, Brazil and other emerging markets happy. Alternatively, large stockpiles indicates something is very wrong with final demand, and hence, the overall economy.

One look at the chart below, which shows how much iron ore has been stockpiled at China's 34 major ports (spoiler alert: it just hit an all time high), should explain at which of these two extremes China currently finds itself.

Here is what happened as explained by Market News:

Weak demand from steelmakers saw iron ore stockpiles at major ports hitting record highs, according to data from industry website umetal.com. Iron ore inventory at China's 34 major ports jumped 4.56 million tons last week to 100.86 million tons as of February 14, the 2nd time it has surpassed the 100 million-ton level and matching the record of 2012. Iron ore imports were also at a record high in January, at 86.83 million tons, as steel traders boosted imports to bet on rising steel prices this year. But data from the China Iron and Steel Association showed crude steel output falling around 2% m/m in January. Average steel prices fell 0.79% last week, according to data compiled by mysteel.com.

There is another, more finely spun, explanation: monetary financing, or in other words, when it comes to China's peculiar "generally accepted collateral", iron is the new copper. Bloomberg explains:

Iron ore stockpiles in China, the world’s biggest buyer, climbed to a record as traders increased imports to use the steel-making raw material as collateral for credit and domestic demand remained weak.

 

“Imports kept piling up at ports as more cargoes are being hauled in for trade-financing deals,” Gao Bo, chief iron ore analyst at Mysteel.com, a researcher in Shanghai, said by phone from Beijing today.

While this may suggest end demand has not completely imploded, it does bring up a different set of complications: steel mill funding difficulties - perhaps the most sore topic in China nowadays.

Steel mills and trading firms in China are contending with increasing difficulty in getting funding, said Mysteel’s Gao.

 

“The funding situation in the steel industry was getting worse last month,” he said.

 

The weighted average lending rate in China was 7.2 percent in December, up from 6.22 percent a year earlier, central bank data released earlier this month show. In December, 63.4 percent of loans had interest rates above benchmarks, up from 59.7 percent a year earlier, according to the central bank.

However one spins it though, there is no denying that in addition to its on again, off again infautation with tapering and deleveraging, which usually continues right until the moment yet another shadow bank has to be bailed out, construction in China has slammed on the brakes:

Stockpiles of steel products also rose as construction activity remained weak after the Lunar New Year holidays, Gao said. Traders’ stockpiles of rebar, a building material, jumped by 65 percent this year to 8.55 million tons last week, according to Shanghai Steelhome.

One thing is certain - the biggest loser, as iron prices are set to tumble, will be Australia.

Iron ore may drop more than previously forecast to $118 a ton this year as China will be unable to absorb record supply from Australia as growth slows, Judy Zhu, an analyst at Standard Chartered Plc, said last week.

 

Prices may average $119 a ton this quarter, $110 in second quarter and drop to $100 in the final period of this year, Goldman Sachs analysts led by Christian Lelong said in the Feb. 11 report.

 

Mine supply of iron ore reached a record over the fourth quarter of 2013, “with the natural destination being China,” Macquarie Group Ltd. said in a Feb. 13 report. “With inventory build being evidenced on the back of higher imports, this will act as a buffer to buyers in the coming months,” it said.

 

China’s shipments from Australia’s Port Hedland, the largest ore-export terminal, rose 27 percent to 23.3 million tons last month. Increased supply from Australia, the top ore shipper, may push the global seaborne surplus to 94.2 million tons this year from 9.1 million tons in 2013, UBS AG estimates.

 

Rio Tinto Group (RIO), the world’s second-biggest exporter, said last month that output rose 7 percent to 55.5 million tons last quarter from 52 million tons a year earlier. Fortescue Metals Group Ltd. is boosting capacity to 155 million tons by the end of March.

And speaking of Australian iron miners, it was in late summer of 2012 when Chinese iron ore stockpiles were once again in the 100 million ton range, when iron prices crashed so bad, that Fortescue was on insolvency watch. Should the current episode of collapsing Chinese end demand persist and construction freeze persist, it may be time to short to FMGAU bonds once again.

Unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation - neither Developing nor Emerging - will dare deviate from the current status quo course of unsustainable, superglued house of cards "muddle-through" until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand.

 

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Mon, 02/17/2014 - 20:06 | 4446187 Stoploss
Stoploss's picture

Oh shit, looks like they're going to have to buy more.................

 

GOLD!!!

Mon, 02/17/2014 - 20:34 | 4446271 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is recommend long copper!

Mon, 02/17/2014 - 22:14 | 4446528 DoChenRollingBearing
DoChenRollingBearing's picture

This is not good news for Peru, but not too bad because Peru is more of a copper & gold kind of place than an iron ore exporter (although they do export some iron ore).

I hope you are right Boris re copper.  Long gold while we're at it.

Mon, 02/17/2014 - 22:29 | 4446582 macholatte
macholatte's picture

 

Peru also has other stuff........

PERU : Cocaine Capital of the World EP 1 | Stacey Dooley Investigates BBC full documentary 2013

https://www.youtube.com/watch?v=jMn0Q9wy8Hs

Mon, 02/17/2014 - 22:32 | 4446587 macholatte
macholatte's picture

not all miners are created equal

 

"The balance of risk to global growth is skewed to the upside, particularly given the broadbased alignment of macro-economic indicators in the major developed economies,"

 

BHP beats forecasts with $US8.1bn profit

http://au.finance.yahoo.com/news/bhp-beats-forecasts-us8-1bn-014401189.html

Tue, 02/18/2014 - 02:19 | 4447113 CheapBastard
CheapBastard's picture

Brazil and Australia better brace themselves for the shock of plunging exports.

Tue, 02/18/2014 - 03:16 | 4447180 manofthenorth
manofthenorth's picture

Funny thing about Gold mining , we never have a stokpile problem. Everyone just wants MOAR !!!!!

Tue, 02/18/2014 - 04:03 | 4447222 ebear
ebear's picture

There's a lot of copper sitting in Chinese warehouses.  What happens when the loans that copper is backing get called?  Worse yet, what happens when the lenders discover that much of that copper has been pledged multiple times?

 

 

Mon, 02/17/2014 - 21:10 | 4446367 National Blessing
National Blessing's picture

I asked my poor old mother if things are getting better.  She hit me in the face with a brick.  Optimism doesn't work.

Thu, 02/20/2014 - 01:37 | 4456162 Hadrianus
Hadrianus's picture

Wouldn't it make perfect sense to buy metals and commodities and just to stock them; ghost cities -even better - when compared to reserves sitting in paper/digital currencies, that await major drop in value due to neverending QE-s? To me it looks like the lesser of two evils...

Mon, 02/17/2014 - 20:06 | 4446189 ziggy59
ziggy59's picture

We are going to need a bigger ghost city!

Mon, 02/17/2014 - 20:35 | 4446272 Boris Alatovkrap
Boris Alatovkrap's picture

Wi mei ku, yu bai!

Mon, 02/17/2014 - 23:58 | 4446852 old naughty
old naughty's picture

not to worry, they'd soon start build again, for rich fuk-u-shima migrants...

steel (iron and coal) will back in demand to keep GDB aboce 7%.

Bail out works!

Printoblivion.

Mon, 02/17/2014 - 20:33 | 4446206 SpanishGoop
SpanishGoop's picture

Iron, the new gold.

Hail Iron.

 

Well i mean if China is stockpiling it.

 

 

Mon, 02/17/2014 - 20:11 | 4446207 gwar5
gwar5's picture

It just gets better and better.

Mon, 02/17/2014 - 20:18 | 4446225 kaiserhoff
kaiserhoff's picture

Five year plans are just ducky,

  or maybe that's duck soup.

Mon, 02/17/2014 - 20:21 | 4446239 buzzsaw99
buzzsaw99's picture

same level it was at this time of the year in 2011 & 2012

Mon, 02/17/2014 - 20:31 | 4446263 LetThemEatRand
LetThemEatRand's picture

I noticed that too.  Not that it doesn't mean anything, but it reminds me of these "biggest miss in 13 weeks" stories we see here a lot that seem intentionally designed to push a message that does not necessarily follow from the data.

Mon, 02/17/2014 - 20:33 | 4446270 LetThemEatRand
LetThemEatRand's picture

Oops, accidentally uparrowed myself instead of buzzsaw.  Anyone have a kleenex?

Mon, 02/17/2014 - 20:36 | 4446279 Boris Alatovkrap
Boris Alatovkrap's picture

Not in Venezuela...

Mon, 02/17/2014 - 20:28 | 4446247 akak
akak's picture

The declining consumptionalization of iron ore is the most recent mattering thing in the eternally unsustainable nature of blobbing-up Chinese Citizenism.

Just have to bear with it.

Tue, 02/18/2014 - 02:45 | 4447143 Freddie
Freddie's picture

Long lead and brass.

Mon, 02/17/2014 - 20:40 | 4446291 mt paul
mt paul's picture

 maybe China is stock piling

 

to rebuild the great wall

out of cast iron..

Mon, 02/17/2014 - 20:44 | 4446305 Cymore Duttz
Cymore Duttz's picture

I wonder how the chart compares to 2007/8 when things went bad. 

Mon, 02/17/2014 - 20:44 | 4446306 Cymore Duttz
Cymore Duttz's picture

I wonder how the chart compares to 2007/8 when things went bad. 

Mon, 02/17/2014 - 20:53 | 4446324 walküre
walküre's picture

Did they actually burn through the stockpiles since 2012? Appears that 2013 must have been one helluva production year for them.

Mon, 02/17/2014 - 20:57 | 4446337 DavrosoftheDaleks
DavrosoftheDaleks's picture

Hmm, I guess Cliff's is going down, I'll probably buy more.

Mon, 02/17/2014 - 20:59 | 4446342 TideFighter
TideFighter's picture

Um, doesn't selling it off as loan collateral imply that they don't need as much of it at home? 

Mon, 02/17/2014 - 21:12 | 4446368 new game
new game's picture

building military...

Mon, 02/17/2014 - 21:42 | 4446409 Fight-Club
Fight-Club's picture

Kudos to ZH, insightful article once again.

Please allow me to add:

US$1.33 trillion in debt rolls forward every 3 months at a higher rate.  Shadow banking system is now 84 per cent of GDP.

Still 64 million empty apartments.  It would be nice to plot these by year/quarter, but I can't find it.  

Nothing like cancer in the water to spark a little unrest also.

Mon, 02/17/2014 - 21:37 | 4446428 Payne
Payne's picture

Just imagine that China declares WAR on Japan, South Korea, Phillipines, pick one.  The US and Europe are so dependent on China that we would be unable to respond other than to bow.

Tue, 02/18/2014 - 00:21 | 4446908 disabledvet
disabledvet's picture

I think they're all too bankrupt over there right now to do that.

Should be great news for Korean ship builders of course.
The Army contract for forty thousand additional MRAP'ed upgraded Hummvee is now going forward.
So it would appear is a massive expansion of the US Carrier fleet...including the very large number of Aegis class destroyers and an entirely new class of "littoral combat ships."

With unemployment this high there is a lot of Max Headroom for hiring.
Building codes could be changed to allow for greater use of steel in home construction as well.

Whatever happened to all the infrastructure monies again?
That should have been millions of tons of steel actually.
Still might happen of course...

Mon, 02/17/2014 - 21:40 | 4446437 q99x2
q99x2's picture

The US has as much Chinese Iron in their dumps.

Gold went to China via JP Morgue but the US is moving to Bitcoin.

Everything is ok.

Mon, 02/17/2014 - 21:50 | 4446461 mobydick
mobydick's picture

Complements of Greg Caravan

 

For Australia, the real interesting point about China's trade figures was the absolutely huge iron ore import figure of 87 million tonnes, a 33% year-on-year increase. At the same time, China's ports are bulging with near record levels of iron ore inventories.

--So what's going on? Bloomberg has the story...

'China's iron ore imports climbed to a record in January as some buyers used the commodity as collateral to get credit, swelling inventories that are already approaching the highest level ever.

'Companies seeking funding amid government efforts to rein in lending and shadow banking are shipping more ore to use as collateral, said Xu Xiangchun, chief analyst at researcher Mysteel.com. Rising purchases by China, the world's largest user of the material, may reduce a global glut forecast for this year by Goldman Sachs Group Inc. and Credit Suisse Group AG.

'“Steel prices have fallen sharply and demand remains weak, so there are no fundamental reasons supporting such a big jump in the raw material imports,” Xu said by phone from Fuzhou today. “The only plausible reason is financing deals.”'

--Copper imports rose to a record monthly level in January as well, so we assume that the punters in China are using 'commodity collateral' to get their hands on cash for use elsewhere in the credit casino.

--So they get a short term letter of credit from a bank or whoever, buy a boatload of iron ore (or a few slabs or copper) and sell it for cash. They punt with the cash for a few months, then repay the loan, presumably making a nice profit along the way. 

--What could possibly go wrong?

Mon, 02/17/2014 - 23:01 | 4446686 Stuck on Zero
Stuck on Zero's picture

An Iron ore consuming country can stockpile a huge amount of ore to jerk around the suppliers.  Simply stop imports for a year or two and all the exporting companies will go bankrupt.  You then buy them all up for a song and then you'll never have to pay again.

 

Mon, 02/17/2014 - 23:20 | 4446739 Jack Burton
Jack Burton's picture

Bad news for us, Iron Ore is our business around here. In fact, billions are slated for new mines, Copper, Nickle and Iron Ore. A loss of Chinese demand and falling prices would stick a dagger into the heart of investors who are fronting the money to develop these mines.

Mon, 02/17/2014 - 23:53 | 4446837 Bear
Bear's picture

A war looks like a good solution for China ... steel for them ... BHO words for us

Tue, 02/18/2014 - 00:53 | 4446968 Bunga Bunga
Bunga Bunga's picture

World will see more Chinese aircraft carriers soon. They are just getting ready to build.

Tue, 02/18/2014 - 04:12 | 4447228 ebear
ebear's picture

The Chinese are playing yesterday's game if they build carriers.  Those things are sitting ducks, just like battleships in WWII. 

Tue, 02/18/2014 - 05:15 | 4447257 catch edge ghost
catch edge ghost's picture

Bob, you there? This is exactly the kind of thing I was telling you about.

You could get guys to put some of that stuff back in the planet. Store it there like it's a vault. Create some jobs. Win win.

Tue, 02/18/2014 - 05:49 | 4447273 smacker
smacker's picture

Look on the positive side of this. Brazil will get to keep one more mountain in Minas Gerais!!

Tue, 02/18/2014 - 06:17 | 4447283 AdvancingTime
AdvancingTime's picture

This is more proof of a major slowdown in China. More details of their problems in the post below,

http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-de...

Tue, 02/18/2014 - 11:24 | 4448011 zippy_uk
zippy_uk's picture

"So as Tungsten is now too expensive, we will insert this into the gold bars instead.."

Wed, 02/19/2014 - 01:19 | 4451519 Schmuck Raker
Schmuck Raker's picture

This is why I love and need ZH....

"Unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation - neither Developing nor Emerging - will dare deviate from the current status quo course of unsustainable, superglued house of cards "muddle-through" until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand."

Damn, the truth hurts sometimes.

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