Headwinds about to hit iron ore?

Iron ore prices have managed to remain fairly steadily above US$50 a tonne since mid-February, even peaking at US$70 a tonne on April 21, but signs suggest this is the calm before the storm.

Spot iron ore prices have been hugely volatile since the start of March 2016, rising or falling more than 3% on 21 occasions, including 9 moves of more than 5%.

On Friday, spot iron gained 2.7% to US$54.89 a tonne, following a 5.8% the day before. But that’s despite a growing mountain of iron ore sitting in stockpiles at Chinese ports.

According to Bloomberg, supplies have climbed above 100 million metric tonnes – the highest level since March 2015, from data by Shanghai Steelhome Information Technology Co. That’s enough supply to cover more than 5 weeks of imports – and port inventories may continue to increase according to forecasts by BHP Billiton Limited (ASX: BHP).

Vicky Binns, vice president of BHP’s marketing minerals told a conference in Singapore on Thursday said port stockpiles could continue to increase through the rest of the year. The expansion in low-cost seaborne output may go on to exceed demand growth in the short to medium term Ms Binns said.

There’s a lot of optimism actually that steel demand in China will increase,” Ralph Leszczynski, the Singapore-based head of research at shipbroker Banchero Costa & Co., told Bloomberg. “It’s a bit of an ‘if’ as the economy is still quite fragile,” he said, calling the rise in port stocks “probably excessive.”

China’s imports increased 4.6% to 83.9 million tonnes in April compared to a year ago – perhaps a sign that steel mills continue to prefer higher-quality Australian and Brazilian iron ore over domestic low-quality ore.

Port Hedland, the major Pilbara port used by Australia’s iron ore majors including BHP, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) saw 37.7 million tonnes shipped in April 2016, up 6.5% over the April 2015.

Foolish takeaway

In March 2015 when stockpiles peaked, iron ore rose as high as US$62.80 a tonne, before plunging more than 25% to US$46.70 a tonne in April 2015. Current rising iron ore stockpiles could have a similar negative effect again.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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