Credit crunch seizes iron ore price

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Friday’s ore price movements showed some stabilisation:

With 12 month swaps catching a break, there is some hope that last’s week’s heavy dump was the capitulation phase for the ore price.

There is not much hope in the fundamentals, however, with rebar falling to a new low and little discussion so far of Chinese steel-makers cutting production. Still, traders will pre-empt the fundamentals and it is not impossible that we’re near the bottom of this move. The magazine cover indicator is beginning to scream with “end of days” coverage in the press last week, even if technicals remain bearish.

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Yet, according to the China Times, a bounce may not yet even be possible with a credit crunch overwhelming the sector and traders in particular:

As a continuing slowdown hits the global steel and iron market, Chinese companies have suffered meager net profits in the first half of this year. Some steel traders in Shanghai have even forged documents for financing with banks, creating a vicious circle for the industry, reports our sister newspaper China Times.

Wang Xiaoqi, deputy chairman of the China Iron and Steel Association, said on Friday that the industry has been facing a severe plight since last month, with the net profit for a ton of steel at only 1.68 yuan (US$0.26) for the first seven months of this year. Lacking stimulus from government policies, the industry will face an even more difficult predicament in the coming fourth quarter and the first quarter of next year.

Some traders in Shanghai, including branches of state-run companies, have been found to have conspired with steel warehouses to forge lease contracts, pretending they held a certain amount of steel materials which in fact were not theirs in order to obtain financing from banks. The traders would not not able to pay back their debts, leading in time to a vicious spiral for the financing chain.

The association recently announced a statement calling for government aid to ease the credit crunch facing the industry.

Most banks in Shanghai have secretly tightened the credit they extend to steel traders and companies based in the provinces of Fujian and Zhejiang. Some banks have stopped lending money to steel companies outright, while others like China Construction Bank and China Everbright Bank have pressed more than 20 steel companies to make good their debts.

What is that Warren Buffet said? It is only when the tide goes out that you can see who has been swimming naked.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.