| LAUNCESTON, Australia
LAUNCESTON, Australia If you did nothing more than look at China's imports of iron ore, you would be satisfied that the robust rally in the price of steel-making ingredient is entirely justified.
February's imports of iron ore look set to continue the recent strength, with vessel-tracking and port data pointing to imports of around 88.78 million tonnes.
The data compiled by Thomson Reuters Supply Chain and Commodity Forecasts doesn't align exactly with Chinese customs numbers given discrepancies of when cargoes are booked as having arrived for customs purposes and differences in volumes onboard vessels.
However, the vessel-tracking data tends to err on the conservative side, with its estimate of 2016 imports some 3.5 percent lower than the official figure of 1.024 billion tonnes.
If the February customs arrivals are in line with the vessel-tracking data, it suggests an acceleration in the pace of imports on a daily basis from January, which were the second highest on record on a monthly count.
Daily imports in January averaged 2.97 million tonnes, and if February's imports are around the ship-tracking estimate, they will be about 3.17 million tonnes.
The strength in iron ore imports is being mirrored in the price, with futures on the Dalian Commodity Exchange (DCE) rising 2.7 percent to close at 710.5 yuan ($103.42) a tonne on Monday.
They are up 28 percent so far this year and have more than tripled since the beginning of 2016, defying the expectations of most market watchers that iron ore would battle to make sustained gains given it remains a well-supplied market.
It's not just Chinese domestic futures that are performing strongly, with contracts traded on the Singapore Commodity Exchange, which are based on the Steel Index spot price, ending on Monday at $88.03 a tonne, up 10.4 percent since the end of last year.
Overall, the robust imports by China, which buys about two-thirds of global seaborne iron ore, appear to justify much of the strong price gains over the past 14 months, even if there does seem to be some froth in the DCE futures, which is perhaps unsurprisingly given their appeal to Chinese day traders.
NEARING A PEAK?
But scratch a little deeper and some serious issues emerge about the sustainability of the iron ore rally.
Inventories of iron ore at 46 major ports hit a record high of 129.35 million tonnes last week, according to consultancy SteelHome.
This is up 15.4 million tonnes since the start of the year and inventories are now 63 percent higher than they were in June 2015, when the uptrend started.
Rising inventories would be fine if they were a reflection of increased demand for steel, but it is likely that China's steel production is close to a peak for now.
The World Steel Association estimates that January output was 67.2 million tonnes, the same as in December.
China's steel production was 808 million tonnes in 2016, up 1.2 percent over the prior year, the association said on Jan. 25.
This was a strong performance in the context of expectations that steel output would actually decline as excess capacity was shuttered, but infrastructure stimulus spending and increased property construction helped keep steel mills producing.
Will this continue in 2017? While it's likely the Chinese authorities want economic growth to continue at around 6-6.5 percent per annum, the chances of strongly rising steel demand this year are uncertain.
Rather it appears the authorities want to continue to rationalise steel capacity and target illegal factories in a bid to cut pollution from burning coal in steel blast furnaces.
While reducing the supply of steel may well help boost its price, it's not necessarily logical that iron ore should ride along just because steel prices are rising.
If iron ore prices keep rising along with inventories, it's likely at some point the level of available stocks will overwhelm appetite to keep importing new cargoes.
There are multiple potential triggers for such a reversal, ranging from a major player deciding to exit a crowded trade, sparking a rush for the door, to some kind of official tightening of commodity trading rules or a change in sentiment toward the economic outlook.
(Editing by Richard Pullin)