Chinese Bets on Rusty Mounds of Ore

March 14, 2014 Leave a comment

Chinese Bets on Rusty Mounds of Ore

ABHEEK BHATTACHARYA

March 11, 2014 10:24 a.m. ET

Trust China to complicate even the straightforward trade in iron ore. The sharp 8% fall in prices this week may have something to do with how the world’s second-biggest economy is suddenly using the metal as an alternative means of financing.

Bad news out of China over the weekend—weak exports, disinflation, the default of the first onshore Chinese bond—raised concerns about industrial growth and spooked metals markets. But as seen in other metals markets, speculation appears to have added an extra twist. Some Chinese traders likely previously bought iron ore and used it as collateral for loans. As the value of this collateral fell, they may have been forced to unload some metal to meet margin calls.

It is hard to estimate how much iron ore China uses for financing. Consider that the country imported 27% more tons in January and February than the year before, even as industries that need steel, such as construction, slowed. China’s major ports have stockpiled a near-record high of 108.6 million tons—and one-third of this could be tied up in financing agreements, says IG market strategist Evan Lucas.

Use of copper as collateral has long been practiced. Doing the same with iron ore is unusual, because a pound of it is worth roughly 1/60th of copper. So it takes a much higher volume of iron ore to back a loan. Iron ore is a key ingredient for steelmaking. It could be a source of credit for that industry, whose losses have hurt access to regular financing, says Saxo Bank’s Ole Hansen.

More broadly, it is also a sign that China’s credit markets may be getting even more constrained.

Expect more volatility if this continues. China consumes two-thirds of the seaborne iron-ore market and futures for the mineral are far less liquid than for copper. So participants can’t easily hedge their exposure to sudden price moves.

The fundamental backdrop is also weak, given rising supply from places such as Australia as new mines and export infrastructure are completed. Throw in opaque financing arrangements and signs of slowing demand in iron ore’s No. 1 consumer, and this is one brittle market.

 

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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