Steel Products Prices North America

Iron Ore Bubble Building in China

February 20, 2014

Iron ore inventories in China are bloated with 100.91 million metric tons of ore now sitting at the 40 major ports in China. This number has grown since the 86 million metric tons reported prior to the beginning of the Chinese New Year in January. This growth continues despite a slowdown in the Chinese steel industry and a crackdown on lending to the steel mills and traders by the Chinese banks.

We spoke with our iron ore trading source located in Asia who deals with the Chinese mills about the situation on a number of occasions over the past few days as much is being written about the “bubble” being built on the back of non-traditional financing using ore as collateral.

First, here is what our ore trader had to say about the traditional way ore is traded in China:

“…When Mills or Traders import Iron Ore, it is based on a 180 day LC from the Bank which means the Bank pays the LC 100% At Sight and then the Applicant, whether Steel mill or Trader, has 180 days to pay back the Bank and this so-called Credit Line. The importers have to put up front a 15% Deposit to the Banks in China and sometimes more, plus pay the LC opening fees, so I think my question is HOW can importers whether Steel Mills or Traders use something as collateral that does not belong to them, but is the Banks assets until it is paid for in 180 days??

The Ore is used and gone by the time they could even consider using it as Collateral. The Banks in China will not allow loans based on Collateral of Cargo not in full ownership of the Steel mill or Trader. Finished Steel at the mills is what is used as borrowing collateral in China John, not Iron Ore and that is why the mills continue to operate at full capacity….”

In an article seen by SMU on Steel Guru, it is being reported state-owned “enterprises” are providing funding for smaller steel mills and traders who are not able to get bank financing. The mills and trading companies are pledging iron ore as collateral which the companies are then able to free up once they sell off their finished products.

The Steel Guru article states, “It is bubble which is ready to burst in due course of time and make the steel and iron ore market even more brittle. It won’t be surprising if Beijing comes down heavily on such practices by easing the lending rates and making credit easier lest risk another reality sector like bad debts and fragile bulge.”

Our Asian iron ore trading source advised SMU, “I advised in a previous email that the credit crunch would bring out new players and yes, it is the State owned companies with cash and credit. They are taking up existing cargos in the ports with cash as well as imports…I advised you this would happen before this report [Steel Guru, Reuters and others] came out. It is also correct the bubble is about to burst as 100.91 million metric tons (+) of iron ore is a serious matter.”