Chinese lending rules weigh on iron ore, copper

Posted by Anton Murray Consulting on 30 Apr, 2014

Lisa Murray and Angus Grigg

China is expected to introduce tough new regulations on commodity-backed finance deals some time in the next week, a move that is weighing on the price of copper and iron ore.

State-owned newspaper, the 21st Century Business Herald, said on Wednesday 31 per cent of China’s iron ore stockpile is currently being used for collateral to raise finance, citing an unnamed industry expert. At April 25, China’s stockpile stood at a record 113 million tonnes.

The country’s banking regulator is expected to raise deposit requirements on letters of credit that have used commodities as collateral. Last week, the China Banking Regulatory Commission, reportedly asked local governments to scrutinise finance deals backed with iron ore.

There is speculation deposit requirements on these deals could double to 30 per cent.

That could force some companies to unwind their positions and sell copper and iron ore back onto the market. Some banks have already started to increase their deposit requirements.

“If the deposit requirement is increased to 30 per cent, it will have a big impact on iron ore imports,” MySteel chief information officer Xu Xiangchun said. “This would cause a slump in the iron ore spot price.”

In a note to clients, Capital Economics’ head of commodities research Julian Jessop said imports of iron ore by steel mills and traders would reportedly be an “immediate target” of regulators.

“Hard data on the extent of this particular form of “shadow financing” is, by its very nature, sparse but it seems likely that other commodities, notably copper, are used more widely for this purpose, not least because they are easier to transport and store.”

In its 2014 financially stability report released on Tuesday, The People’s Bank of China said credit risk had risen in industries suffering from overcapacity and there had been “a relatively big increase” for non-performing loans in the steel, solar power, shipbuilding and glass sectors.

Capital is forecasting the global price of copper, currently around US$6780 ($7323) a tonne, will drop below US$6000 before any sustained recovery. Iron ore is now trading at seven-week low of $US108.60 a tonne.

“At 3 per cent year on year growth and record shipments from suppliers, we are not overly optimistic about the potential rebound range for ore pricing at the moment, especially while the property sector in China continues to suffer so markedly,” said Melinda Moore, an analyst at Standard Bank.

There are increasing concerns the world’s second biggest economy will slow markedly this year, dragged down by a drop in property investment and sluggish conditions across the manufacturing sector

In Hangzhou, a major commercial city outside Shanghai, prices fell 11.3 per cent in the first three months of the year and sales volumes were down 37.8 per cent.

In a sign of how worried local authorities are about falling prices, the government said it must approve any new discounts.

In the nearby cities of Changzhou and Taizhou the situation appears even worse, as developers offer discounts above 35 per cent in a bid to clear surplus stock.

And now this steep decline in sales has reached China’s so-called first tier cities. In the first 27 days of April, property transactions fell by 19 per cent in Beijing, Shanghai, Guangzhou and Shenzhen.

Meanwhile, provinces across China missed their growth forecasts in the first quarter. Hebei, the biggest steel producing province in China, reported economic growth of just 4.2 per cent, compared to its 8 per cent target.

At the same time, Shanxi, a major coal mining hub, grew 5.5 per cent, missing its 9 per cent forecast.

Australian Financial Review

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