More on China’s ore for cash scams

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The MSM spruik machine turns its eye to iron ore today and likes what it sees. From Reuters via the AFR:

Chinese steel mills and traders are buying more iron ore to use as collateral to secure loans, helping imports and stocks of the raw material defy expectations for a slowdown in demand by the world’s biggest consumer.

The increasing use of iron ore for financing explains why China is maintaining its voracious appetite even as a slowing economy threatens to curb demand for steel.

…Steel mills had turned to Chinese state-owned enterprises for funding by pledging iron ore as collateral, said an official with a state-run iron ore trading firm based in Hangzhou.

“Steel mills come to us for financing support because we can get a loan from the bank,” he said. “They give us iron ore which we give back when they pay back the money plus interest. Our interest is a bit higher than the bank but they cannot get a bank loan themselves.”

There are also traders who obtain cheap US dollar-denominated loans via letters of credit overseas, import the iron ore and then sell it in the spot market.

They can invest the cash, which they only need to pay back in three to six months, in other sectors such as real estate.

…Citigroup analyst Ivan Szpakowski said: “Financing activity is definitely quite strong and the fact that there’s tight credit in China has helped spur demand.”

Let’s see now:

  • mills use iron ore as collateral to obtain credit
  • ore stockpiles in ports because there’s no underlying demand
  • collapsing profitability on lousy demand but still high input cost of iron ore causes destock at mills
  • weakening ore price undermines collateral value
  • lenders make margin call and/or dump ore into falling market
  • iron ore price collapses

May I say that it’s tremendous that these dynamics are loose in our largest export!

 

David Llewellyn-Smith
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Comments

  1. Lol. Recall a couple of years back Chinese officials bemoaning the financialisation of IO.

    Don’t believe all the hype.

  2. Have the steel mills paid for the ore at the point of the loan. If so it’s a normal commercial arrangement especially where credit is difficult to get through the normal channels.

    If they haven’t paid and are borrowing against an asset that they do not yet own, then that becomes dangerous especially at higher rates of interest.

    Are they borrowing against the stock of steel produced, are they borrowing against their debtors ledger? So many unanswered questions.

      • Well the article also says “They give us iron ore which we give back when they pay back the money plus interest” which suggests that the lender takes delivery of the ore, and that doesn’t make any sense.

        I have a friend who is a translater, he sources the original article in Mandarin and often the source article and the English translation are two different stories.

        It’s just so opague, that’s why the constant impending China doom articles that we have seen streaming through the media over many years have been so wrong – one day they will be right, but probably not today.

  3. The words “state-owned enterprises” are the only reason this won’t end in tears.

    When these financing arrangements fall apart (which is inevitable) the State Council will step in to save the day.

    Won’t be easy (or fun for the poor bureaucrats involved from the “state-owned enterprises”), but it won’t be a disaster either.

  4. This article is some unconnected dots joined together, with little understanding it would seem, and then an added a dose of conspiracy.

    It might be that the only way the mills can raise funds is to pledge stock to non traditional financiers, and this is very likely a sign of credit prudence (or tightness) by the banks, but some of the additional words don’t really add a lot other than sensation.