Chinese importers of soybeans and rubber are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy

China Soybean, Rubber Importers Renege on Deals

Canceled Contracts Add to Evidence Showing Rising Financial Stress in the Country

HUILENG TAN

March 27, 2014 6:07 a.m. ET

Chinese importers of soybeans and rubber are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy.

Most purchases are private, with little data on the volumes affected, but traders at Asian trading firms say they are seeing a sharp rise in canceled contracts this year while other buyers are demanding heavy discounts.

The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans, used to make cooking oil, and compares to imports of 63.4 million tons last year. South American soybean contracts have also been canceled because of weak demand, says trade journal Oil World.

The cancellations are a big worry for the commodity markets as exporters around the world had relied for years on China’s insatiable appetite for a wide range of raw ingredients. But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals.

Natural rubber, mostly grown in Southeast Asia and used to make products ranging from tires to latex gloves, is also getting hit as some buyers from China refuse to honor existing agreements, or look for ways to negotiate discounts. Two large Asian rubber producers, who asked not to be named, said Chinese buyers had defaulted on them.

Traders say buyers are trying to ask for discounts, citing reasons such as cargo arriving a few days late and claims about poor quality or contamination, said Bundit Kerdvongbundit, vice president of Von Bundit Co., Thailand’s second-largest natural rubber producer. The contracts are already signed, but Chinese importers “refuse to take cargo or pay unless they get discounts.”

One comfort is that most companies trading with China have taken some sort of safeguards after widespread defaults in the wake of the 2008 global financial crisis, like asking for deposits, said Benson Lim, chief operating officer and head of global rubber trading at R1 International.

However, “the business is so competitive that not all sellers are taking deposits, so they are hard-hit when buyers default,” he added.

Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China’s slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on.

Commodities are particularly sensitive to the health of the economy given the their wide-ranging use. But with China this month recording its first ever corporate bond default, andfears over a property developer, investors are growing jittery as Beijing tries to clamp down on years of reckless lending.

“The number one problem is weak demand from the credit tightening last year and real estate which has a direct or pass through effect on all of this activity,” said Shanghai-based Citi Research commodities strategist Ivan Szpakowski.

 

About bambooinnovator
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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