Iron ore rally at risk as port holdings surge to new high

Iron ore, the surprise commodity performer of 2016, suddenly faces a stumbling block. Stockpiles held at China’s ports may soon expand to breach 100mn metric tonnes for the first time in a year as supplies increase, potentially weighing on prices.The holdings surged 2.3% to 97mn tonnes last week, the highest since April 2015, according to Shanghai Steelhome Information Technology Co. After rising for the past three quarters, they may top 100mn tonnes in the coming months, according to MineLife Pty and Westpac Banking Corp.“There’s every chance that port inventories will swell to above 100mn tons in the near term,” Gavin Wendt, founding director & senior resource analyst at MineLife, said by e-mail. “This will obviously have an impact on iron ore prices and cap the potential for any further recovery.”While iron ore has staged a surprise rally in 2016 as Chinese policy makers signalled their willingness to bolster growth, prices have given up some of their gains in the past two weeks as the holdings rose. Billionaire Gina Rinehart’s Roy Hill venture in Australia is ramping up operations this year, and last month dispatched its inaugural China-bound cargo. Miners including Rio Tinto Group and BHP Billiton are targeting higher output and figures on Tuesday showed exports from Port Hedland at the highest ever.Ore with 62% content in Qingdao was at $54.75 a dry tonne on Tuesday after falling 2.8% last week, according to Metal Bulletin. In the first quarter, the price rose 23% as steel mills in China boosted output before the peak- construction season, the country’s leaders pledged to back growth and supplies from Port Hedland were disrupted in January. Futures in Asia fell on Wednesday, with the SGX AsiaClear contract losing 1.1% to $49.“Given the supply disruption in the first quarter, what we expect is that suppliers would try to meet their targets” by increasing shipments, said Di Wang, an analyst at CRU Group. “Usually a rising inventory level indicates the oversupply situation in the market, which would put pressure on price.”Exports from Australia’s Port Hedland climbed to a record 39.53mn tonnes in March from 36.63mn in February, according to data from the port authority. The facility handles shipments from BHP, Fortescue Metals Group and Rinehart’s Roy Hill. Last month, cargoes to China rose to 32.6mn tonnes compared with 29.14mn tonnes in February.Port stockpiles of ore were rising as some smaller steel producers in China had yet to restart, and the holdings were out of step with those for steel, according to Fortescue Chief Executive Officer Nev Power. Should iron inventories “continue to climb, we will see the price fall and iron output will trim back,” Power said in an interview in Hong Kong. “The market has to remain in balance.” Supply is set to exceed demand in the second quarter, potentially boosting stockpiles above 100mn tonnes, unless there’s a meaningful lift in China’s steel output, according to Justin Smirk, a senior economist at Westpac. The rise in inventories highlights weakness in the underlying market, and prices may slump back below $50 in the three months through June, he said in an e-mail.