February 2014 – CHINA - As we warned last week, stockpiles of iron-ore have reached record levels in China as end-demand slumps but, as Bloomberg notes, this is potentially creating massive dislocations in other markets. Record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. A stunning 40 percent of the iron ore at China’s ports are part of finance deals (having replaced copper after China’s last shadow-banking crackdown) and with the glut, prices drop (driving down the value of collateral on loans) and “borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.” As we noted last week, Bloomberg reports China’s record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. Iron Ore stockpiles are record highs. But Lenders seeking repayment are finding irregularities, including the same pile of materials used as collateral for multiple borrowings, China International Capital Corp. said. Xiao Jiashou, known as the “steel-trading king” in Shanghai, had his assets frozen as China Minsheng Banking Corp. sues for money owed. About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates. “The risk comes when metal prices fall by a large magnitude within a short time, driving down the value of the collateral,” Yang Changhua, a researcher with Beijing Antaike Information Development Co., said in a Feb. 19 interview. “Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.” And those prices are tumbling: Steel reinforcement-bar futures in Shanghai have fallen 19 percent in the past year, while iron ore delivered to China’s Tianjin port dropped 22 percent. And non-performing loans are therefore – exploding (as we noted here)… Traders began having trouble repaying loans when steel prices in China slumped 38 percent in the seven months through August 2012 as the economy slowed. In the southern city of Foshan alone, local banks have given 100 billion yuan in credit to steel traders, Caijing magazine reported this week, citing a local banker it didn’t name. Loans to the sector helped drive non-performing loans in Yunnan province to 5.86 percent as of November 2013… At China Citic Bank Corp., bad assets surged from 2011 to 2013 mainly because of non-performing loans to the steel-trade industry, Moneyweek magazine reported on Feb. 17, citing bank President Zhu Xiaohuang. The lender said on Dec. 12 that it plans to write off 5.2 billion yuan of bad debt for 2013. At least a third of China’s 200,000 steel-trading firms will collapse as part of the credit crisis which started at the end of 2011, the official Xinhua news agency said Feb. 7, citing industry estimates. Nanjing Iron & Steel Co. said last month its 2018 bonds may stop trading due to losses. Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace. –Zero Hedge
Posted on: Sat, 22 Feb 2014 21:07:09 +0000
Trending Topics
Recently Viewed Topics
© 2015