* Probe impact on iron ore prices to help steel producers
* Sees iron ore prices around $100 a tonne in medium term
* Financing probe carries risk of sell-off, price
(Adds analyst and trader quotes)
By David Stanway and Ruby Lian
BEIJING/SHANGHAI, April 30 A Chinese probe into
the use of iron ore for financing could help local steelmakers
by cutting prices of the raw material, the country's biggest
listed steelmaker Baoshan Iron and Steel (Baosteel)
said on Wednesday.
However Baosteel, which has long complained about the high
cost of iron ore, said it still expected prices to hold around
$100 a tonne in the medium term, not far below current levels,
despite a big increase in output by miners.
The China Banking Regulatory Commission has ordered an
investigation into the use of iron ore as collateral in
financing deals, a move that prompted a steep fall in iron ore
futures this week as investors feared a crackdown that would
Iron ore futures fell 4.5 percent on Monday, but have since
steadied as the market awaits any further action.
"Financing deals on imported iron ore are facing risks, but
as far as steel manufacturers are concerned, if the loosening of
these risks can bring iron ore prices back to a rational level,
it can only be a good thing," Baosteel chairman He Wenbo said
after the company reported a 7 percent fall in quarterly profit.
China's steel industry, by far the world's biggest, suffers
from chronic overcapacity and the government is attempting to
curb output by closing smaller, higher-polluting mills.
Baosteel's He said moves by banks to cut loans to the steel
and iron ore sector were part of efforts to reduce liquidity and
help implement environmental policies, but were unlikely to have
an impact on big, high-end steel producers.
Analysts said a potential crackdown on iron ore financing
and a widening supply surplus in the second half of the year
could still lead to further falls in iron ore prices.
"Port inventories are too high and overseas supplies will
increase by a large amount from the second half," said Fu Yang,
an analyst with Shanghai's Guotai Junan Futures.
"For steel mills and traders, the problem is that banks are
still squeezing credit and if they can't repay loans when the
letter of credit is due, they will have to sell iron ore to
obtain cash, which might cause overselling in market and drag
down prices to maybe even $90 a tonne."
China's iron ore imports surged 19 percent to a record 22
million tonnes in the first quarter.
There are no reliable figures on how much of this has been
used for financing purposes, but iron ore inventories have
swelled to record levels above 108 million tonnes over past few
Traders said a large number of iron ore port inventories
were purchased using letters of credit at about $130-$140 a
tonne in December and January, compared with current spot prices
Traders and mills, which are already struggling with cash
flow, are expected to repay loans in May, raising market fears
that they might have to sell their stocks to survive if banks
decide to further raise the size of the deposit needed to obtain
credit or cut access to credit.
"There are more steel mills starting to resell iron ore
cargoes that they have purchased from global miners on annual
contracts at index plus to lock in profit and get cash," said an
iron ore buying official with a state-owned steelmaker.
Baosteel's He said the steel sector would continue to
struggle, but the company did not expect new central government
measures aimed at stimulating demand.
Big Chinese steelmakers made combined losses of 2.33 billion
yuan ($372.59 million) in the first quarter, as weak demand and
overcapacity cut prices.
"To prevent investment from falling too quickly, a number of
big infrastructure projects like railways will be steadily
pushed forward, and monetary policy could also be relaxed a
little," he said.
Baosteel forecast total crude steel output to rise by 3.8
percent to 809 million tonnes in 2014, He said. Apparent steel
consumption was expected to reach 752 million tonnes, up 3.3
percent on the year.
(Reporting by David Stanway and Ruby Lian; Editing by Richard