Replies to post #8127 on The Rising Influence of Rising Affluence

[ilpapa]

I was actually thinking of adding something the effect that there are a lot of cooks tasting that broth

[jbog]

Credit not steel, China's new use of iron ore props up demand

Tue, Feb 18 2014

By Manolo Serapio Jr

SINGAPORE (Reuters) - 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.

Commodities such as copper and rubber have been commonly used for financing in China, but Beijing's tightening of lending in sectors plagued by overcapacity such as steel has made it harder to secure bank loans, spurring financing demand for iron ore, according to industry sources familiar with the practice.

Robust Chinese imports are supporting prices and underpinning expansion plans at top miners such as Vale, Rio Tinto and BHP Billiton.

But there is also a risk that Beijing could crack down on the practice and take out a big chunk of demand rapidly.

"I think some steel mills and traders could not stop importing iron ore, because once they stop, they will lose their financial support from banks," said an iron ore trader in Tianjin in northern China, a major delivery port for iron ore into the country.

China's iron ore imports reached a record 86.8 million tonnes in January, topping a previous high of 77.8 million tonnes set only two months ago.

The surge in shipments also inflated stockpiles at Chinese ports to an all-time high above 100 million tonnes, suggesting that actual domestic consumption was anything but brisk.

Steel mills have 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. They give us iron ore which we give back when they pay back the money plus interest," he said. "Our interest is a bit higher than the bank but they cannot get a bank loan themselves."

There are also traders who obtain cheap U.S. 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.
The use of iron ore for financing is similar to schemes using copper, which also helped lift China's copper imports to an all-time high of 536,000 tonnes in January.

"Financing activity is definitely quite strong and the fact that there's tight credit in China has helped spur demand," said Citigroup analyst Ivan Szpakowski.

The People's Bank of China is trying to engineer a gradual rise in the cost of money to encourage firms to deleverage and discourage high-risk shadow banking activity.

RELIEF AND RISK
More financing deals may help offset a global seaborne supply surplus that Citigroup and UBS see reaching 90 million tonnes this year.

Iron ore prices, now trading above $120 a tonne, are forecast to average at a five-year low this year, according to a Reuters poll of 14 analysts in January.

"We could see some more records as the year progresses. We do expect to a see a slowdown in demand but it should still remain fairly robust," said Jeremy Platt, analyst at UK steel consultancy MEPS. He added that the bulk of the iron ore remains tied to steelmaking rather than financing.

The risks that come with financing deals also mean it is likely to be an unreliable source of import growth.

A trader in China's eastern Shandong province said he had stopped the practice because of the losses that it entailed.

"If you cannot make good use of the money within three or six months, you incur a loss plus you pay the interest rate. It's really not a good idea," he said.

Last year, some Chinese banks stopped funding smaller copper importers who use the metal in trade financing after Beijing moved to crack down on fake trades amid signs that hot money inflows have helped push the yuan to record highs.

(Editing by Ed Davies)

[jbog]

Well, bearish iron-ore forecasters originally said a huge price swoon would occur in 2H13, but it didn’t happen. As noted in various posts on this board, a lot of the supply that was expected to come online by now or in the near future has been delayed or defunded.

BHP Joins Rio Tinto in Seeing Iron Ore Price Dropping on Supply
By Elisabeth Behrmann - Feb 17, 2014

BHP Billiton Ltd. (BHP), the world’s third-biggest iron ore exporter, said the price of its most profitable product will likely decline this year as rising supply moves the market into surplus.

“The very strong growth in supply is more than enough to create a bit of an excess and therefore to drive the price lower,” Andrew Mackenzie, chief executive officer of the Melbourne-based company said today on an analyst web cast. “There may be a few ups and down in the next quarter or two, perhaps a little bit of a recovery in that demand but we still see some issues arising from new supply.”

The forecast is the latest sign that the largest producers of the steelmaking raw material are preparing for lower earnings from their major product. Supply increases by companies including BHP, Rio Tinto Group and Vale SA may push the global seaborne surplus of iron ore to 90 million metric tons this year from a balanced market in 2013, UBS AG estimates.

“Any major producer that recognizes a substantial, price-changing surplus forming in its market, is likely to be assessing its own capacity to tolerate and respond to weaker prices,” Tom Price, a Sydney-based commodity market analyst said in an e-mail. “As a large, low-cost iron ore producer, BHP Billiton’s iron ore business is well placed to cope in the short-term with even substantially lower prices.”

Benchmark iron ore prices to China have dropped 7.3 percent this year to $124.40 a metric ton yesterday and are forecast to decline every year until at least 2017, according to data compiled by Bloomberg.

Rio Echo

Mackenzie’s comments echo expectations by Rio Tinto Group CEO Sam Walsh, who in December said new capacity will lower prices during 2014.

Iron ore is the most profitable unit for both companies, generating 52 percent of BHP’s underlying earnings before interest and tax for the six months to Dec. 31. Rio, the second-largest producer, last year got 77 percent of its earnings before interest, tax, depreciation and amortization from iron ore.

Vale, Rio Tinto and BHP, which together supply about two-thirds of seaborne iron ore, are nearing the end of an investment splurge on new mines and port facilities to meet demand from China, the biggest consumer.

In China, which buys about 60 percent of seaborne iron ore, demand growth from steelmakers has slowed as the government implements policies to move away from building new roads, bridges and rail roads toward a consumption-led economy.

China to Slow

China’s steel production rate will rise 3 percent to almost 800 million tons this year, according to UBS’ Price. That compares with an expected 12 percent lift in global seaborne iron ore supply to 1.347 billion tons. This includes a 18 percent boost from Australia, the biggest exporter.

“Chinese steel production growth rates are expected to decelerate to levels considerably below gross domestic product growth in the short-term as the economy matures following a period of steel-intensive, infrastructure-led growth,” BHP said today in its half-year earnings statement. The company reported a 31 percent rise in underlying earnings of $7.8 billion, beating analyst expectations of $6.9 billion.

Vale, the biggest iron ore exporter, expects prices may “oscillate” but doesn’t see “any chance” of the commodity dropping below $110 a ton, according to comments yesterday by Jose Carlos Martins, Vale’s executive director for ferrous and strategy.

“BHP certainly doesn’t sound as bullish as what some of the other miners say regarding future prices,” Christian Lelong, a Sydney-based commodity analyst with Goldman Sachs Group Inc., said by phone.

Slowest Pace

Analysts expect China, the mining industry’s biggest customer, to grow at the slowest pace in 24 years in 2014. The ruling Communist Party is trying to balance reining in a credit boom while maintaining expansion above Premier Li Keqiang’s 7 percent “bottom line” to sustain employment.

China’s tighter credit controls and improved environmental regulations may help iron ore importers of high-quality iron ore, Mackenzie said.

“There’s a lot of work that the government is doing, in some cases using the debt market to lead to some form of restructuring of the iron ore and the steel industry,” he said. This will mean “in the medium-term, more supply of iron ore from outside the country,” he said.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at [e-mail]

To contact the editors responsible for this story: Andrew Hobbs at [e-mail]; Jason Rogers at [e-mail]