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Iron Ore Prices Hit Fresh 21-Month Lows As Commodity Ponzi Probe Escalates

Iron Ore Prices Hit Fresh 21-Month Lows As Commodity Ponzi Probe Escalates

Tyler Durden on 06/13/2014 11:24 -0400

Anxiety over the Qingdao port and warehouse probe is slowly but surely creeping through all the commodities that were used in China’s commoditty-financing-deals (as we noted here). With Copper hurting (and gold picking up), Iron Ore prices have tumbled to 21-month lows (near the lowest since 2009) as ‘real’ demand slows as the economy slows and ‘financial’ demand is crushed as “banks are more vigilant about iron ore financing.” As Bloomberg reports, investigators are trying to determine if individual batches of commodities were used multiple times to secure loans. This is making banks nervous (shadow and non-shadow) and while iron ore inventory is falling, prices are adjusting lower rapidly as traders anticipate “financing problems forcing traders to dump ore.”

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As Bloomberg reports, things are not looking rosy for the commodity ponzi probe…

“Banks are more vigilant about iron ore financing… credit is clearly tight for a lot of people in the sector.”

Investigators are trying to determine if single batches of copper and aluminum were used to secure multiple loans, bankers assisting with the probe told Bloomberg News this week. This will spur foreign banks to lend less money against commodity inventories in China, Goldman Sachs Group Inc. said June 9.

“If the probe spills over to iron ore inventory, traders will have problems getting financing,” Wu Zhili, a steel analyst at Shenhua Futures Co. in Shenzhen, said by phone. “They might start to dump ore, resulting in a market selloff.”

“We are now well into a process of price adjustment,” said Ric Spooner, chief market analyst at CMC Markets in Sydney, forecasting an average of $100 this year. “The supply surplus appears to be biting much faster than many assumed now that it’s finally emerged.”

As we explained previously, the CCFD unwind works as follows…

In this context, an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry) (Exhibit 11).

Which must make market participants wonder just how much of the gains in various industriual commodities were due to artificial financing needs and not real demand.. which in turn created mal-inmvestment signals all around the world.

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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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