* Financing deals helped China's iron ore imports, stocks
* China is tightening credit to sectors with overcapacity
* Commodities such as copper and rubber commonly used for
By Manolo Serapio Jr
SINGAPORE, Feb 18 Chinese steel mills and
traders are buying more iron ore to use as collateral to secure
loans, helping imports and stocks of the raw material defy
expectations for a slowdown in demand by the world's biggest
The increasing use of iron ore for financing explains why
China is maintaining its voracious appetite even as a slowing
economy threatens to curb demand for steel.
Commodities such as copper and rubber have been commonly
used for financing in China, but Beijing's tightening of lending
in sectors plagued by overcapacity such as steel has made it
harder to secure bank loans, spurring financing demand for iron
ore, according to industry sources familiar with the practice.
Robust Chinese imports are supporting prices and
underpinning expansion plans at top miners such as Vale
, Rio Tinto and BHP Billiton
But there is also a risk that Beijing could crack down on
the practice and take out a big chunk of demand rapidly.
"I think some steel mills and traders could not stop
importing iron ore, because once they stop, they will lose their
financial support from banks," said an iron ore trader in
Tianjin in northern China, a major delivery port for iron ore
into the country.
China's iron ore imports reached a record 86.8 million
tonnes in January, topping a previous high of 77.8 million
tonnes set only two months ago.
The surge in shipments also inflated stockpiles at Chinese
ports to an all-time high above 100 million tonnes, suggesting
that actual domestic consumption was anything but brisk.
Steel mills have turned to Chinese state-owned enterprises
for funding by pledging iron ore as collateral, said an official
with a state-run iron ore trading firm based in Hangzhou.
"Steel mills come to us for financing support because we can
get a loan from the bank. They give us iron ore which we give
back when they pay back the money plus interest," he said.
"Our interest is a bit higher than the bank but they cannot
get a bank loan themselves."
There are also traders who obtain cheap U.S.
dollar-denominated loans via letters of credit overseas, import
the iron ore and then sell it in the spot market.
They can invest the cash, which they only need to pay back
in three to six months, in other sectors such as real estate.
The use of iron ore for financing is similar to schemes
using copper, which also helped lift China's copper imports to
an all-time high of 536,000 tonnes in January.
"Financing activity is definitely quite strong and the fact
that there's tight credit in China has helped spur demand," said
Citigroup analyst Ivan Szpakowski.
The People's Bank of China is trying to engineer a gradual
rise in the cost of money to encourage firms to deleverage and
discourage high-risk shadow banking activity.
RELIEF AND RISK
More financing deals may help offset a global seaborne
supply surplus that Citigroup and UBS see reaching 90 million
tonnes this year.
Iron ore prices , now trading above $120 a
tonne, are forecast to average at a five-year low this year,
according to a Reuters poll of 14 analysts in January.
"We could see some more records as the year progresses. We
do expect to a see a slowdown in demand but it should still
remain fairly robust," said Jeremy Platt, analyst at UK steel
consultancy MEPS. He added that the bulk of the iron ore remains
tied to steelmaking rather than financing.
The risks that come with financing deals also mean it is
likely to be an unreliable source of import growth.
A trader in China's eastern Shandong province said he had
stopped the practice because of the losses that it entailed.
"If you cannot make good use of the money within three or
six months, you incur a loss plus you pay the interest rate.
It's really not a good idea," he said.
Last year, some Chinese banks stopped funding smaller copper
importers who use the metal in trade financing after Beijing
moved to crack down on fake trades amid signs that hot money
inflows have helped push the yuan to record highs.