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China warehouse fraud scandal weighs on iron ore price; It is estimated that as much as 40 per cent of the iron ore sitting at Chinese ports is being used as collateral

China scandal weighs on iron ore price

June 23, 2014 – 10:51AM

James Thomson

Hopes of a recovery in the iron ore price could be dashed by reports that a financing scandal has put the brakes on imports of iron ore and copper at key Chinese ports.

Just days after iron ore minnow Termite Resources shuttered its Cairn Hill iron ore mine in South Australia, reports in the Wall Street Journal suggest that banks are examining allegations that a Chinese trading company pledged metal as collateral to more than one lender.

Chinese traders have long used commodities such as iron ore and copper as collateral to borrow from overseas, thus avoiding both China’s capital controls and its higher interest rates.

It is estimated that as much as 40 per cent of the iron ore sitting at Chinese ports is being used as collateral, and Goldman Sachs estimates $US100 billion ($106.5 billion) has been borrowed in this way since 2010.

While Chinese banks have been clamping down on the practice of borrowing using commodities for some months – this is one reason the iron ore spot price has fallen more than 30 per cent since the start of the year – the fraud allegations present a new issue.

According to the commodities traders cited by The Wall Street Journal, the financing scandal appears to have put the brakes on copper and iron ore moving through ports, with customs officials now taking 15 to 20 days to clear shipments, up from seven to 10 days previously.

Still, the fraud allegations and the ensuing slowdown at the port of Qingdao, are only part of the reason for the fall in the iron ore price.

Major producers, led by BHP Billiton, Rio Tinto and Brazil’s Vale, are ignoring the falling iron ore price and the slowing Chinese economy and ramping up production in a bid to wipe out higher-cost, lower-quality producers in China and around the world.

The result is growing inventory of iron ore in China and growing discounts on offer to traders.

Last week The Australian Financial Review revealed that Rio Tinto and Fortescue Metals Group have both increased the discounts they offer on lower grade iron ore.

Estimates from China suggest that while Chinese steel production has risen by 2 per cent to 5 per cent, iron ore imports are up 20 per cent this year.

The resultant oversupply is putting particular pressure on lower-quality product.

After sinking below the $US90-a-tonne level last week, iron ore spot prices ticked up on Friday and are tipped to rise further in the early part of the week.

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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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