Here are the iron ore charts for April 29, 2014:
So, not so good. Paper markets were smashed, including rebar futures, which are back at their lows. Physical was hit hard too and the Baltic Dry capesize component fell 2% as well:
The news on steel is good with CISA reporting the average aggregate daily crude steel production in China in mid-April was approx. 2.28 million mt, up 6.0% from early April. However, given falling steel prices, the output increase is probably unsustainable.
But the news was all about credit, from Reuters:
China’s banking regulator has urged local authorities and banks to step up an investigation into iron ore financing deals in a bid to minimize default risks, prompting a sell-off in iron ore futures that saw prices fall nearly five percent.
The probe, confirmed to Reuters by sources with direct knowledge of the matter, raised fears that the crackdown on commodities-backed financing could unleash a flood of iron ore sales from 100 million tonnes-plus of stocks sitting at Chinese ports, raising the prospect of a price slump.
…In a document issued on April 18, the commission told local regulators and banks to start investigating iron ore financing and to submit detailed reports by April 30.
“Local offices must step up measures to manage risks arising from commodities trade financing and to assess the risks presented by iron ore financing,” the CBRC said, adding that regulators should also check if firms were logging fake trades to secure financing.
Trade sources said Chinese banks have started to tighten loan requirements for steelmills and trading firms seeking credit for iron ore imports.
“The thing we’ve been hearing from traders is the margin on the letters of credit has gone up quite sharply over the last week – it used to be 10-20 percent and now is 40-50 percent, and that seems seems to be forcing a bit of liquidation (to cover the margin call),” said Graeme Train, an analyst at Macquarie Commodities Research in Shanghai.
Although Chinese banks have been gradually cutting back on loans to the steel sector since late last year, many private mills saw their lines of credit either suddenly cut off or slashed at the start of the year.
While the credit crunch has caused some floundering mills to shut, others stepped up iron ore imports as a way to get trade financing, which was more easily available and offered at a lower interest rate. They would then sell the raw material in the domestic spot market
to raise cash.
The article goes on the describe other SOE’s stepping into the breach with vendor financing and other sources but, really, the noose on this little ponzi is closing fast. During the last downside spike of iron ore six weeks ago I said China was now in a position to break the iron ore speculator loop that has tormented it for many years. Stand in its way if you dare!
