This is the second part in a series of articles describing how satellite-based analytics can provide valuable intelligence for traders of iron ore, the primary input for making steel. In this piece, we discuss how stockpile levels reveal important information on market conditions.
A major question swirling around financial markets today is whether China’s fiscal spending will breathe life into the world’s second-largest economy and offset a number of bearish factors, led by a property crisis.
Last week, credit ratings agency Moody’s downgraded its outlook for Chinese sovereign bonds for the first time since 2017.
But how will investors even know if Beijing’s efforts are bearing fruit? One sector to watch is construction activity, which is often associated with economic growth in China.
When it comes to China, however, official economic data is viewed with healthy skepticism, creating the need for third-party sources to confirm or rebut government statistics.
The process also entails some creative thinking, following the “breadcrumbs” to discover the ground truth.
Our proposition that China’s construction activity serves as a proxy for the country’s economic health is a good example of this approach.
If construction activity picks up, then so too should demand for iron ore, the main input to produce iron and steel. And if iron ore demand increases, then iron ore stockpiles should decline because inventories fall when demand increases, assuming supply is steady.
A line can therefore be drawn between China’s economic growth and iron ore stockpile levels.
This means that information on iron ore stockpiles is relevant not only to commodities, but to broader financial markets, including currencies and equities, both of which are highly sensitive to signs about the strength of the Chinese economy.
We can dig a bit deeper and examine the specific locations in China where most of the stockpiles are kept.
Iron ore stockpiles can be found at ports and smelters. The map below shows a selection of ports where iron ore is received and stored.
The six largest ports, in descending order, are Qingdao, Caofeidian, Tianjin, Lianyungang, Jintang, and Dongjiakou.
While China is the world’s top importer by far, the largest exporters are Australia and Brazil, followed by South Africa in distant third place.
Any supply changes from these exporters are also market-moving factors. For that reason, information on stockpiles is significant because it reveals early clues on supply trends.
Heavy rains, for example, may disrupt mining operations that can curtail production. Eventually, exports will decline, which will be visible in the number of vessels loading iron ore.
Before anyone sees the slowdown in export loadings, the impact of product problems will be seen in stockpiles. Specifically, stockpiles will fall sharply because iron ore is loaded to meet export commitments, but fresh supplies don’t arrive fast enough to replenish inventories.
So where do you look?
The maps below show stockpile locations in Australia, Brazil and South Africa, including Port Hedland, the world’s largest iron ore export terminal.
Portside inventories in China are often cited as market-moving data, with relatively low inventories considered bullish and high inventories perceived bearish with respect to iron ore benchmark prices.
But this data often comes from a single publication inside China, creating the need for credible third-party sources that can objectively provide information on stockpiles. And apart from China, information on iron ore stockpiles is even harder to find.
Next up, we will discuss a technique, using radar satellite imagery, to measure stockpiles anywhere in the world, regardless of weather or time of day.