--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 23 The brouhaha over
suspected metal financing fraud at China's Qingdao port is
likely to cause short-term angst, but longer-term gains.
Banks and authorities are now probing allegations of whether
a private Chinese metals trading firm was duplicating warehouse
certificates in order to use a cargo several times to raise
The immediate impact is likely to be a sharp tightening of
lending practices to China-based metals traders, thereby
limiting their ability to participate in the market.
Longer-term, it's likely that China's massive warehousing
sector will come under further scrutiny and may eventually be
forced to adopt tighter rules, such as those at facilities
regulated by the London Metal Exchange (LME).
While the issue has so far been limited to Qingdao port and
to deals involving copper and aluminium, there are concerns the
issue may be more widespread and linked to more commodities,
such as iron ore and soybeans.
While the potential ramifications from the Qingdao
warehousing issues are significant, the impact on market pricing
hasn't been so clear as yet.
Benchmark spot iron ore .IO62-CNI=SI dropped in the days
after the Qingdao news first surfaced, hitting a 21-month low of
$89 a tonne on June 16. It has since recovered slightly to close
at $92.10 on June 20.
Iron ore has been on a weakening trend since December amid
rising supply from global miners and concern over the pace of
economic growth in China, which buys about two-thirds of
Chinese traders are already being starved of credit as banks
increase the scrutiny of financing deals linked to iron ore
This may result in short-term selling of distressed
inventory as smaller trading companies scramble for cash to pay
With Chinese port inventories at a record 113.4 million
tonnes on June 20, up 0.8 percent from a week earlier, the
likelihood of downward pressure on iron ore prices increases.
But it's not necessarily a one-way street for iron ore
prices, as inventories of the raw material at steel mills are
believed to be low, meaning they will be tempted to snap up
supplies, especially given recent price weakness.
This may explain why spot prices have actually risen for the
past four trading sessions.
Demand for iron ore from the steel sector is also positive,
with global output rising at an annual 2.2 percent in May as
output in China reached record levels and mills in North America
and Europe boosted production.
While rising steel output is putting downward pressure on
prices of the finished metal, it will serve to boost appetite
for iron ore, suggesting that China may be able to chew its way
through its excess inventories without causing prices to decline
Certainly, iron ore futures on the Dalian Commodity Exchange
are suggesting prices are more than likely going to stabilise
around current levels.
The futures curve <0#DCIO:> is currently flat between the
second and six month contracts, with the second month at 684
yuan ($109.96) a tonne and the six-month at 685 yuan.
A month ago, the curve was fairly steeply backwardated, with
the second-month contract at an 8.8 percent premium to the
six-month, a structure that implies prices are still likely to
COPPER IN QINGDAO BOOST?
With copper, the impact of the Qingdao probe may actually be
serving to boost prices, with London-traded futures
rising for a sixth straight day on June 20, the longest winning
streak this year.
The Qingdao issue is raising concern over the status of
supplies, with physical copper in Shanghai now commanding a
premium over front-month futures, having been trading at a
discount earlier this month.
Another potential impact from Qingdao is that Chinese
imports of metals will decline in coming months, as traders find
themselves shut off from letters of credit.
This will likely only be a short-term issue as financially
stronger players will be able to step in to fill any gaps in
Longer-term, if the use of commodities as collateral for
financing is curtailed, this should make the markets more
responsive to actual supply and demand fundamentals, and ease
volatility caused by uncertainty over so-called dark
inventories, i.e. those being held for financing.
In the meantime, until the extent of the problems at Qingdao
is quantified, there is likely to be uncertainty that may impact
on liquidity in China's metal markets.
However, if the wash-up from Qingdao results in a more
transparent warehousing system, stricter access to credit and a
clear-out of less scrupulous operators, then it can be viewed as
an overall positive.
(Editing by Muralikumar Anantharaman)