I will resist the urge to laugh and will instead say “you can never say never”. What it will take to return prices to $135 is a full blown Chinese steel mill restock. For that to happen we’ll need to see the Chines property market not just stabilise but rebound strongly well. It’s a faith-based forecast.
Meanwhile, Clyde Russell is back with more good news:
Iron ore has been on a weakening trend since December amid rising supply from global miners and concern over the pace of economic growth in China, which buys about two-thirds of seaborne cargoes.
Chinese traders are already being starved of credit as banks increase the scrutiny of financing deals linked to iron ore imports.
This may result in short-term selling of distressed inventory as smaller trading companies scramble for cash to pay off loans.
With Chinese port inventories at a record 113.4 million tonnes on June 20, up 0.8 percent from a week earlier, the likelihood of downward pressure on iron ore prices increases.
But it’s not necessarily a one-way street for iron ore prices, as inventories of the raw material at steel mills are believed to be low, meaning they will be tempted to snap up supplies, especially given recent price weakness.
This may explain why spot prices have actually risen for the past four trading sessions.
And? Total inventories are still at reasonable levels. There is no driver of a restocking pulse so long as real estate is sliding and without restocking iron ore will bleed lower on oversupply.
Investing in Chinese Stocks is reporting that the port probe is widening and deepening:
A story on the growing Chinese port scandal at Money163 was out yesterday during trading hours in Hong Kong, but Qingdao Port International stock actually rose on the day.
A figure floating around is ¥16 billion spread among 18 banks, but according to a relevant party, the numbers are still being tallied and he doesn’t know where that figure is from.
How it works: Company A sells goods to Company C for a fixed price, then Company B buys from C at a higher price.
Next company A asks for a warehouse receipt and gives it to C. Company C uses this to obtain bank credit, adds in some of its own money and pays A for the goods.
At the end Company B has the goods, and they can sell them to Company A. Company A gets another warehouse receipt.
For letters of credit: pledge 15% to 20% of imported metal to a bank for a 90 or 180 day letter of credit. But companies really only need about one month to receive the goods and sell them. So the company has 60 to 150 days of short-term financing, plus any yuan appreciation. However, the goods obtained using a letter of credit can also be rehypothecated using the above method. Dezheng used this method with 3 month letters of credit 4 times a year and was able to achieve 10 times leverage.
The banks are rushing in to figure out what’s going on, but local businesses claim they are reaping what they sowed. They claim to be victims, but they all rushed to give Dezheng credit, sometimes even without collateral guarantees.
Banks are raising their margins in response and some traders unable to come up with the funds may dump their positions. Banks are also expanding credit approval from 3-5 days to 5-7 days, requiring more documentation and verification of information.
The 21st Century Business Herald has more about the Dezheng case and suggest the proceeds of the scam were channeled into real estate. One analyst said, in regard to Dezheng’s real estate investments, that he was shocked at their complexity. Cases have been filed in Qingdao’s courts involving more than 10 contracts, 9 banks and 29 companies. And that’s only from June 16 to June 20.
Of course it will pass, when the crooks have been shaken out, and the system will be healthier with far fewer traders having a smaller impact on iron ore prices than previously.
Source: macrobusiness
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