Market Overview

China's Hidden Iron Ore Supply

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China's Hidden Iron Ore Supply
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China seems to have excess iron ore supply, and this “unaccounted inventory” poses “acute downside risk” to iron ore prices, Axiom’s Gordon L. Johnson said in a report. He assigned an Underweight rating on the sector and recommended short positions in Cliffs Natural Resources Inc (NYSE: CLF), United States Steel Corporation (NYSE: X) and Rio Tinto plc (ADR) (NYSE: RIO).

Unaccounted Iron-Ore Inventory

While iron ore imports into China have increased by 78 million tons this year, iron ore consumption has risen by merely 10 million tons, with at least flat domestic iron ore supply. Moreover, port inventories are up 18 million tons year to date, analyst Johnson mentioned. He added, “All of this begs the question [...] where is all the excess inventory at?”

Low Steel Demand In China

According to the National Bureau of Statistics, China’s new residential home prices rose in 50 out of 70 cities in November, representing a 58bps month-over-month increase on average, which is the lowest since February this year. Prices of existing homes rose in 47 out of 70 cities, up only 34bps month-over-month on average, the lowest since January 2016. Prices for residential space rose only 7.7 percent month-over-month in November, up by the least since January.

“While the cause of this effect, as we see it, is due to buying restrictions imposed across >17 cities, we contend the worst is yet to come — to wit, we believe slowing growth in property sales/prices will feed into new housing starts (i.e., ~36 percent of China’s steel demand) and, thus, see warning signs abound,” Johnson commented.

Weather May Lend Support

Weather could result in a hit to supply, which could lend near-term support to prices of iron ore and coal, the analyst stated. He added, however, that spot prices were “already detached from fundamentals,” which means support could be “muted.”

Ratings

Johnson has Sell ratings on:

  • Cliffs Natural Resources.
  • GATX Corporation (NYSE: GATX).
  • Joy Global Inc. (NYSE: JOY).
  • Rio Tinto.
  • Trinity Industries Inc (NYSE: TRN).
  • United Rentals, Inc. (NYSE: URI).
  • U.S. Steel.

Latest Ratings for CLF

DateFirmActionFromTo
Feb 2018Credit SuisseUpgradesUnderperformOutperform
Jan 2018Vertical GroupInitiates Coverage OnSell
Oct 2017JP MorganDowngradesOverweightNeutral

View More Analyst Ratings for CLF
View the Latest Analyst Ratings

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