--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 6 The mad dash by
banks and traders to see who owns what metal inventories at
China's Qingdao port should help bring a swift, and much-needed,
end to the practice of using commodities for credit.
For the past few years one of the known unknowns in China's
metals markets has been the use of imports as collateral to
secure financing for investments in higher yielding assets, such
This has been most apparent in copper, with iron ore, gold,
soybeans and other commodities also affected, with the
consequent building up of so-called dark inventories, which are
stocks being held for purposes unrelated to supply and demand
It was revealed this week that banks and trading houses are
checking their exposure to metal financing at Qingdao, the
world's seventh-largest port, amid concern that single cargoes
of metal have been used several times to obtain financing.
This means there are potentially cargoes with more than one
owner, raising the possibility of defaults on loans and complex
The authorities have yet to confirm they are investigating,
but it seems more likely than not that any foul play will
convince them to crack down further on the shadow banking
For physical commodities, the increasing concern over
financing means that Chinese markets may be disrupted in the
short term, especially if there is distressed selling of stocks.
This may serve to dampen imports for a few months as the
inventory overhang is worked through, but thereafter the market
should be more reflective of actual supply and demand.
Iron ore would appear to the commodity currently most
vulnerable in the short term, given the high inventories at
Chinese ports, the softer economic growth being experienced and
the weak spot prices.
Inventories at Chinese ports stood at a record 106.9 million
tonnes last week, which is roughly 1.4 times the average of
monthly imports between January and April this year.
The Asian spot price .IO62-CNI=SI has lifted slightly
since reaching a 20-month low of $91.80 a tonne, closing on
Thursday at $94.30.
However, it is still down almost 30 percent so far this
year, which is likely to put pressure on any loans secured by
iron ore inventories.
ANY RALLY MAY BE MUTED
The possible unwinding of financing deals, coupled with high
port inventories may serve to limit any rebound in iron ore
prices that has in past years happened as Chinese steel demand
for construction ramps up for the peak building season over
Supply is also increasing, particularly from top exporter
Australia, where the capacity additions by major miners BHP
Billiton and Rio Tinto are starting to come on
However, further price weakness looks unlikely with both the
Singapore Exchange iron ore swaps curve <0#SGXIOS:> and the
Dalian Commodity Exchange futures <0#DCIO:> pointing to a steady
to slightly bullish outlook.
The backwardation of Dalian futures has eased in the past 10
days, with the second-month contract now at a premium of just
1.7 percent to the six-month, down from a premium of 8.7 percent
on May 26.
This has largely been achieved by the shorter-dated future
losing value, with the second month contract dropping from 769
yuan ($123.04) a tonne on May 26 to 698 yuan in midday trade on
The Singapore swaps have moved from mild backwardation on
May 26 to extremely mild contango. The six-month swap was at
$94.38 a tonne on Friday, a premium of 0.13 percent to the
While such a tiny premium hardly indicates a rally, the move
from backwardation to contango is supportive of the view that
prices are near the bottom and may gain in coming weeks.
While market participants tend to focus on possible
short-term price moves, the main takeaway from the concern over
possible abuses in the shadow banking sector is that the Chinese
authorities clarify their position and implement clear
While the market would be better served by ending the
practice altogether, even an unambiguous set of rules and
supervision by the authorities would boost confidence among
producers, traders and buyers.
(Editing by Ed Davies)