| SINGAPORE, April 15
SINGAPORE, April 15 A crackdown in China on
financing backed by commodities risks unleashing a flood of iron
ore sales from tens of millions of tonnes of the raw material
sitting at Chinese ports, raising the prospect of a renewed
Investors who have raised funds against mostly unhedged iron
ore could be at risk in the event of a price fall due to
sluggish steel demand, leading to forced sales as banks wind
back loans against the raw material, analysts and traders
Beijing's moves to tighten access to credit have led to
buyers defaulting on about $300 million of soybean imports in
recent weeks, while fears of an unravelling of copper financing
deals helped push the metal to a three-and-a-half year low in
Iron ore prices have recovered after slumping 8 percent in a
single day to a 17-month trough last month as steel prices
plunged, but a fragile outlook for steel consumption in China
and towering port stocks mean the steelmaking raw material
remains vulnerable to another rout.
Iron ore port stocks stood at a near record above 108
million tonnes SH-TOT-IRONINV last week, enough to build
almost 1,200 New York Empire State buildings.
"A big crisis has passed, but with the high inventory, the
risk is still there for iron ore prices," said Helen Lau, senior
mining analyst at UOB-Kay Hian Securities in Hong Kong.
"It's all subject to how fast steel demand will recover
going forward, and what I see is a mild recovery."
Commodities such as copper and rubber have been commonly
used for financing, where traders or investors borrow against
the commodity with the aim of investing the money in high-return
areas such as real estate.
But Beijing's credit tightening has spurred investors
desperate for cash to turn to iron ore. Industry sources
familiar with the practice estimate some 30 million tonnes or
$3.5 billion of stocks are now tied up by financing.
A surge in China's iron ore imports from late last year has
been largely driven by these financing deals, traders and
analysts say, but caution the raw material is an unlikely
candidate for financing.
Unlike copper, most of the iron ore at the ports is not
hedged, meaning those raising money against it are unable to
lock in a price and remain exposed to any price fall, increasing
the risk of a forced sale.
Hedging is little used by Chinese steel mills and iron ore
traders, with the industry only shifting to spot pricing in
recent years after 40 years of fixing iron ore prices annually.
The Dalian Commodity Exchange launched China's only futures
market for iron ore just six months ago and foreign bourses have
found it hard to convince the Chinese market to hedge via the
more established iron ore swaps.
"I have not heard of too many Chinese traders hedging," said
a foreign iron ore trader, one of a few who does hedge and did
so recently on a 300,000-tonne cargo.
Chinese mills and traders also operate on narrow margins and
are unused to paying to fully hedge their positions, added a
Shanghai-based trader whose company has never hedged its port
"Since cash is tight, we don't have extra funds to hedge our
position in the futures market," he said.
STORAGE, PRICE ISSUES
At the same time, the price of iron ore is particularly
Iron ore has recovered nearly 12 percent since its rout in
March but remains down 13 percent for the year, compared with a
more muted fall and recovery for copper.
"The person who ends up holding the cargo is making an
all-in bet that the person on the other end is going to be able
to pay for it and unload it," said Graeme Train, analyst at
Macquarie Securities in Shanghai.
"With iron ore it is difficult to hedge and it can be very
volatile, so that is the big risk."
Unlike copper, which has varied applications, iron ore is
also solely used for steelmaking, and presents storage problems.
"You cannot stockpile iron ore too long, otherwise the iron
will be oxidised and the quality will go down," said UOB-Kay
Iron ore also takes up a lot of space at ports, which can
increase charges if they want to move the cargo or to free up
space, said a trader who had a cargo stored at a port for up to
Iron ore at around $116.90 a tonne .IO62-CN=SOI is worth
much less than copper at around $6,700 a tonne, so storage and
logistics costs make up a bigger percentage of the overall
"It's not exactly a very profitable thing to be doing," said
a source at a foreign lender with a presence in China.
China has up to $160 billion of outstanding loans using
commodities as collateral, about 31 percent of the country's
short-term foreign exchange loans, according to Goldman Sachs.
The steel sector is now taking a hit from China's crackdown
on high-risk shadow banking activity as well as curbs on lending
to shape up sectors plagued by excess capacity.
Many Chinese banks have slashed lending to these sectors by
up to 20 percent, part of Beijing's efforts to reform an economy
that in three decades relied on cheap debt to expand at a
Some traders say credit conditions are tightening even
further, with some banks refusing to open letters of credit
(LCs) to industries such as iron ore and coal.
A Shanghai-based trader who sells Asian cargoes to Chinese
mills said a buyer was recently refused a letter of credit by a
major Chinese state lender, but was able to get credit at
"Our bank in Hong Kong has been warning us that the future
might come when Chinese banks will refuse to open a letter of
credit," he said.
(Additional reporting by David Stanway in Beijing; Editing by