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How China's Commodity-Financing Bubble Becomes Globally Contagious

Tyler Durden's picture




 

"Marubeni [the world's largest soybean exporter to China] is deluded in thinking that payments will come once the cargoes have sailed," is the message from an increasing number of liquidity-strapped Chinese firms, "If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts." As we explained in great detail here, this is the transmission mechanism by which China's commodity-financing catastrophe spreads contagiously to the rest of the world. A glance at the Baltic Dry is one indication of the global nature of the problem (and Genco Shipping's $1 billion bankruptcy), but as Reuters reports, "If buyers cannot resolve the issue, they may also cancel future shipments."

 

Reuters notes that China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.

Traders estimate more than 10 million tonnes of soybeans, out of China's imports of 63.4 million tonnes last year, are imported for financing annually.

And the lack of liquidity and forced losses means China's buyers ain't paying...

Chinese buyers may default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the United States and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer said.

 

...

 

Honoring these deals would cause Chinese buyers to incur a loss of as much as $7 million per shipment,

 

"If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts," Shao said.

Of course, this odd 'beggars are choosers' almost monopoly of buying pressure dry-up means Chinese buyers can play hard-ball...

"Most of the cargoes were delivered by the seller before receiving letters-of-credit and buyers are unwilling to pay now because they will suffer massive losses," said Shao, speaking from a hotel suite he uses when in Rizhao in this eastern province.

 

"If buyers cannot resolve the issue, they may also cancel future shipments."

 

...

 

Some Chinese commodity buyers have previously threatened to default, or cancel cargoes, to force sellers to take lower prices.

 

...

 

"Marubeni is deluded in thinking that payments will come once the cargoes have sailed," said an industry executive also based in Shandong, who declined to be identified

 

With so many shipments at risk of a default, Chinese buyers now have a upper hand in bargaining for lower prices.

 

"Most of the cargoes will eventually be sold to China. This will force sellers to renegotiate prices, which will benefit buyers,"

And the lower prices will only exacerbate liquidity problems as collateral value tumbles on the soybean-backed loans.

And this means counterparty risk is rising broadly - which means haircuts (or Letters of Credit) soar, collapsing liquidity conditions and leading to a further vicious tightening cycle...

Banks, once content to rake in profits from the lending, have been spooked by growing losses at crushers and trading firms and have begun tightening credit.

 

"They are asking for more a higher deposit to opening a LC (letter of credit) nowadays; before it was set at 10 percent of the contract value but banks have gradually raised the level to between 20-30 percent," said an executive at a trading firm.

 

Industry sources said the hike has severely crimped traders' cash flow, with weak demand leaving them with high inventory they cannot liquidate fast enough.

As we explained previously,

While apologists of China's collapse have been quick to point out that China's credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private - corporate - debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9'ed.

And sure enough that is what Reuters reports above is happening... which means only one thing...

We explained precisely this a few days ago in "What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?" As briefly noted above, these are all the commodities that serve as conduits in China's numerous Commodity Funding Deals. Only no more.

Which means that far form merely crushing exporters who suddenly are dealing with Chinese importers who have torn apart contracts, obviously with no recourse, suddenly China's entire "hot money" laundering infrastructure (which as explained over the weekend, has gold performing an even greater role than copper) is about to collapse.

And when the counterparties of China's hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times and has been sold, then there is truly no way of saying what happens next.

 

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Mon, 04/21/2014 - 21:17 | 4681365 InjectTheVenom
InjectTheVenom's picture

Ho Li Fuk !!

Mon, 04/21/2014 - 21:26 | 4681385 Almost Solvent
Almost Solvent's picture

This should be an epic unwind.

Midwest soybean farmers ain't gonna put up with getting shafted by orientals for long.

Plus the expansion of Obamacards is set to take off later this year.

I'm lovin' it!

http://www.npr.org/blogs/codeswitch/2014/04/18/304591220/the-golden-arch...

Mon, 04/21/2014 - 21:59 | 4681453 Vint Slugs
Vint Slugs's picture

Forget the USA midwest soybean farmers.  What about the Brazilians?

Ironic isn't it?  Marubeni is a Japanese trading firm with China as a major client at a time when Chinese "courts" have deemed that (non-sovereign WWII) debt obligations betw China & Japan should be settled by Chinese confiscation of Japanese assets.

Mon, 04/21/2014 - 22:03 | 4681467 DoChenRollingBearing
DoChenRollingBearing's picture

 

 

A nice lesson can be learned here.  If you sell to China by Letter of Credit, don't ship before you have received an L/C and that it is confirmed by your bank.

Or tell the Chinese to pony up 20% in advance (before cargo arrives to port).  They don't buy it, you keep the money.  That's what I did a long time ago selling to Venezuela...  

:)

Mon, 04/21/2014 - 22:31 | 4681527 rosiescenario
rosiescenario's picture

...an irrevocable, confirmed LC

Tue, 04/22/2014 - 09:46 | 4682378 Kayman
Kayman's picture

...an irrevocable, confirmed LC

issued by a bank that doesn't go bankrupt.

Sun, 04/27/2014 - 09:25 | 4700864 Bindar Dundat
Bindar Dundat's picture

That used to mean a major U.S. bank when I was doing trade with China.  Not so sure anymore..

Tue, 04/22/2014 - 09:32 | 4682327 post turtle saver
post turtle saver's picture

step 1: Asian financial crisis

step 2: trade war

step 3: regional war in central Europe

step 4: Russian Flu 2, The Sequel

c'mon guys, this playbook was trotted out in '97-'98... history may not repeat but it sure as hell rhymes

Mon, 04/21/2014 - 21:20 | 4681368 Stuck on Zero
Stuck on Zero's picture

Gold exchange bitchez.

 

Mon, 04/21/2014 - 21:31 | 4681399 Squid-puppets a...
Squid-puppets a-go-go's picture

indeed. there's been a rash of commenters in the last coupla weeks opining about gold going well above $10k/oz by 2020, more than the usual suspects.

I mean sheesh, Ron Paul saying $50k not out of the question?

Mon, 04/21/2014 - 22:09 | 4681477 DoChenRollingBearing
DoChenRollingBearing's picture

There are at least THREE active bloggers (besides Fringe Blogger Bearing) who say that $55,000 - $130,000 (non-hyperinflated dollars) will be the price before too long.  Here's the King:

http://fofoa.blogspot.com/

It is long & hard reading, I would start in late 2009 (October or so), you will have to be prepared to invest a lot of time.  But, his first article in February 2014 is a relatively good summary of his ideas.

 

EDIT:

Even Jim SInclair thinks $50,000 is reasonable (so that's four), here's a link:

http://www.jsmineset.com/

Tue, 04/22/2014 - 07:27 | 4682026 Modern Money Me...
Modern Money Mechanics's picture

It is not that complicated. Use the (constant) value of labor as the metric rather than the always changing price of Federal Reserve Notes. Most places in the world, people put in a 12 hour day for a 10th of an ounce of silver. Thus, an ounce of silver holds 10 days of 12-hour labor. Using minimum wage, that makes an ounce of silver worth ~$1,000. And anyone can buy an ounce of silver now for $20 in FRNs. It is the deal of a life-time if you can hold on to it longer than the exixting system can keep the confidence of Joe Sixpack.

Mon, 04/21/2014 - 21:21 | 4681370 Cabreado
Cabreado's picture

"there is truly no way of saying what happens next."

Frustrated Little Boys in High Places will start Wars.

Mon, 04/21/2014 - 21:22 | 4681375 TheReplacement
TheReplacement's picture

So I get deflation out of that.  But add in all the currency printing (real and virtual) and we should get inflation.  I suspect we will get on and then the other as the financial yoyo strips wealth from everyone from top to bottom or vice versa (bottom first starting years ago I suppose).

Gold may be worth a lot in the future.  The question is, will you starve to death before it then?

Mon, 04/21/2014 - 21:31 | 4681400 Caviar Emptor
Caviar Emptor's picture

Ha yes, grasshopper, biflation is deeply embedded in the root of the problem

Mon, 04/21/2014 - 23:46 | 4681686 dryam
dryam's picture

It's more than biflation.  There will be a reset on the pricing of everything.

Tue, 04/22/2014 - 06:16 | 4681945 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Rickards rightly says it's a tug-of-war. Those always end with one set of guys in a pile on the ground. My bet is on the inflation team "winning".

Mon, 04/21/2014 - 21:23 | 4681378 JPM Hater001
JPM Hater001's picture

But when?

 

Mon, 04/21/2014 - 21:27 | 4681389 Seeking Aphids
Seeking Aphids's picture

The difference between gold and the other commodities listed is clear: gold remains a highly liquid asset that is essentially money. Whoever ends up with the gold wins. Whoever ends up with the copper has....copper.

Mon, 04/21/2014 - 21:28 | 4681391 walküre
walküre's picture

If you think that's all bad news... Imagine if you will, the 2016 US presidential race of Bush vs Clinton. What's the point anymore?

Mon, 04/21/2014 - 21:57 | 4681446 NoDebt
NoDebt's picture

You just ruined my evening.  Thanks.

Tue, 04/22/2014 - 06:47 | 4681966 weburke
weburke's picture

Jeb missed the darkness injection, he is a fourth degree knight of columbus........ If you are willing to view yourself as a citizen of the new rome empire home base........you will at least be realistic. Look at the stars and stripes, what is the color of the braiding around it. Regular folks are missing what makes the betrayers cooperate. The reason harvard wants history removed from schools is ? 

Tue, 04/22/2014 - 09:01 | 4682213 Bastiat
Bastiat's picture

Can you explain that last sentence?

Tue, 04/22/2014 - 02:54 | 4681868 Surging Chaos
Surging Chaos's picture

It's like War of the Roses, but with a modern twist!

Tue, 04/22/2014 - 06:17 | 4681946 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

There won't be anything left for me to vomit if that's how it plays out. RIP America.

Mon, 04/21/2014 - 21:37 | 4681410 Caviar Emptor
Caviar Emptor's picture

If China goes bust, then cue Janet to print a quadrillion overnight to 'flood the market with liquidity' and buy up all the bad Chinese debt and stick it on the balance sheet. Then a quadrillion more to make sure all world citizens have plenty of drugs to take to sedate their worried minds.

Long fortune cookie companies: they'll be the first to get bailed out

Mon, 04/21/2014 - 23:05 | 4681601 AdvancingTime
AdvancingTime's picture

 Such a scenario could cause a loss of faith in intangible products or goods.  The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion.

If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. It is important to remember that debts can go unpaid and promises be left unfilled. More on how we have sowed the seeds for inflation to suddenly strike in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

Mon, 04/21/2014 - 21:41 | 4681417 Unknown Poster
Unknown Poster's picture

Chinese financiers are world class at gaming the system.

Mon, 04/21/2014 - 21:52 | 4681439 logicalman
logicalman's picture

Financiers are world class at gaming the system.

FIFY

Tue, 04/22/2014 - 01:08 | 4681801 old naughty
old naughty's picture

Puppet masters behind all financiers are galaxy class at gaming the system.

Mon, 04/21/2014 - 21:48 | 4681424 Doubleguns
Doubleguns's picture

If folks stop delivering to china what happens? When there is no food in china, they will pay, someone will pay and probably in US treasury bonds. Hungry folks in the streets would not bode well in china. You need a billion bullets to deal with that problem. Maybe the cargo ship they confiscated was carrying soybeans.

Voided contracts? Really!! Money up front now folks. This is getting crazy. I guess they could always eat treasury bonds if it comes down to that.

Do not invest in soybeans this year.  

Mon, 04/21/2014 - 21:53 | 4681438 Vint Slugs
Vint Slugs's picture

Do not invest (long side)  in commodiies this year.

Mon, 04/21/2014 - 22:36 | 4681541 rosiescenario
rosiescenario's picture

...and there suddenly might be a new supply of bonds hitting the market.

 

It is becoming increasingly clear why the Chinese government was encouraging its people to buy gold.

Tue, 04/22/2014 - 01:58 | 4681837 pitz
pitz's picture

There's no shortage of food in China.  That's why these cargos are being rejected/defaulted on. 

Mon, 04/21/2014 - 22:01 | 4681436 Vint Slugs
Mon, 04/21/2014 - 22:10 | 4681486 MrSteve
MrSteve's picture

I bet China does have the money to buy food, they just want the Early
Bird Special pricing. If they make you hold your assets under water long enough, they'll get it.

Mon, 04/21/2014 - 22:29 | 4681523 My Days Are Get...
My Days Are Getting Fewer's picture

I guess for some its easy come, easy go.

We ship nothing outside the US or Canada without 100% cash money in our US bank account.

Or, the buyer pays 50% cash down and puts up, with our US bank, an irrevocable, unrestricted and unconditional letter of Credit, which we draw down before the goods leave the USA.  And, the L/C is limited to 50% of the total purchase price (including off-shore  installation).  We do this for shipments to India and elsewhere.  You have no recourse, once the boxed shipments are on board and en route.

Tue, 04/22/2014 - 06:12 | 4681944 Winston Churchill
Winston Churchill's picture

I had a confirmed irrevocable LoC dishonored once. When Saddam invaded Kuwait.
Exim paid up a year later.These exports will be insured.

Tue, 04/22/2014 - 09:38 | 4682344 post turtle saver
post turtle saver's picture

right, force majeure...

Mon, 04/21/2014 - 22:34 | 4681535 q99x2
q99x2's picture

Arrest the exporters for treason. Impeach Obama.

Mon, 04/21/2014 - 22:55 | 4681582 AdvancingTime
AdvancingTime's picture

Whether by design or merely as a byproduct of globalization we have weaved a web of financial transactions that circle the globe. Over the last several years as money was printed by the central Banks it was not contained in the countries where in was printed. This money flowed across borders influencing and distorting markets and prices across the world.

Some people have been calling for a "world currency" for years. the saying "one should never let a good crisis go to waste" means a meltdown with high levels of fear would present a perfect opportunity to advance this agenda down the field. Remember many people with agendas have a lot to gain when a major shift in the currency markets takes place. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/02/contagion-may-lead-to-new-world-c...

Tue, 04/22/2014 - 00:23 | 4681765 mumbo_jumbo
mumbo_jumbo's picture

we already have a world currency and it's called the US dollar.

the dollar will end as that by a major war and only then, there is no country on the planet that isn't printing like mad but still need dollars to settle accounts so I'm not sure how the end of the dollar is good for anyone.....and i can't eat or drink gold.

and lets not forget that (as posted here many times) China has printed even more than the US and by a lot so.......

Mon, 04/21/2014 - 23:47 | 4681682 WMM II
WMM II's picture

"And when the counterparties of China's hundreds of billions in CCFDs decide to also get out of Dodge and unwind these deals (amounting to hundreds of billions in notional), only to find the underlying commodity has not only been re-re-rehypotecated countless times and has been sold, then there is truly no way of saying what happens next."

 

sure there's a way of saying what happens next.

it may not be accurate, but i'll give it a go:

First, you catch the drift of the news that the 'banks' (except gulpman sucks and the jaypeemoargoon group) are getting out of the commodities business because of fed policy?

ok, back to the fine article by what is certainly an veteran zh quality author. ( they do stand out, don't they? its a good thing. :) )

the dumb suppliers did business without gettin paid for it. that'll stop. the unpaid for surplus of 'commodity" in this case is perishable and good for one thing. not financing, of course. the price for soybeans does in fact drop in china. it has to. surplus in a communist country.

then of course the price of soybeans will be lower in the future too. after all, the poor thing will no longer have to carry the cost of the no-value-added business model called 'no delivery here' speculators.

now, let's wait and see what comes to pass.

 

:)

Tue, 04/22/2014 - 00:08 | 4681733 mumbo_jumbo
mumbo_jumbo's picture

it's getting real troublesome posting and even being here, Firefox keeps trying to run a script that fucks up the whole experience and i just got caught in a nightmare browser lock up.

 

WHAT. THE. FUCK. IS. GOING. ON????  MAYBE YOU COULD SLOW DOWN ON THE FUCKING ADS THAT SEEM TO BE THE MOST IMPORTANT CONTENT HERE OF LATE????????????????????????? CAUSE MANY TIMES DURING THE LOCK UP I CAN SEE IN THE LOWER LEFT CORNER OF MY BROWSER "transferring from 'insert add domain name here'" before i see anything the hedge has to offer.

JUST A FUCKING THOUGHT.

Tue, 04/22/2014 - 05:34 | 4681933 UselessEater
UselessEater's picture

Ad Block Plus works well for me.

Tue, 04/22/2014 - 08:35 | 4682131 Serenity Now
Serenity Now's picture

mumbo,

Thanks for mentioning this!  I have been having trouble for a few weeks.  It takes forever to post, scroll through a thread, etc.  It's a new ZH pain in the ass, and I think it's due to the ads.  The website is locking up way too often, even as I type right now

one

word

per

minute

is

not

a

good

use

of

my

time

 

Tue, 04/22/2014 - 10:15 | 4682469 NoTTD
NoTTD's picture

Using Chrome without problem.

 

Maybe Mozilla is now devoting all its assest to hunting down and punishing homophobes.

Tue, 04/22/2014 - 00:42 | 4681785 Schmuck Raker
Schmuck Raker's picture

"Chinese buyers now have a upper hand in bargaining for lower prices""NOW" being the operative word here.

Tue, 04/22/2014 - 04:22 | 4681911 Peter Pan
Peter Pan's picture

When the Chinese were rehypothecating commodities over and over again, the money was not lost. Go to Canada, Australia and elsewhere and see the real estate they have bought.

Fri, 04/25/2014 - 16:02 | 4696916 pitz
pitz's picture

Almost no actual "Chinese money" in Canadian RE.  Only Canadian debt.

Tue, 04/22/2014 - 08:30 | 4682118 Quinvarius
Quinvarius's picture

So now the realization hits that the arcane CFD problem that was invented to scare people involving mysterious offshore accounts, financial wizards, and hidden gold did not exist.  Quick, put a foundation on it!   Now it is merely people borrowing money to import stuff.  This CFD meme is Goldman hogwash.

Tue, 04/22/2014 - 09:40 | 4682353 Bastiat
Bastiat's picture

Trying to sort through this stuff...

If an item is rehypothecated multiple times and its value declines does that not trigger a margin call by each lender?  IT seems this would increase the demand for collateral. If the borrower defaults and the lenders liquidate the collateral, maybe one is made whole and the others get nothing or maybe if it is 3X hypothecated, each gets a third (minus costs of recovery) plus whatever each respective borrower can pay having liquidated whatever else he can to repay the loan.  That's how the deflation spreads.

Of course borrowing against already pledged collateral is fraud on the borrowers part and negligence on the lenders part unless it is disclosed.  Then the second claim would have to be subordinate to the first (as with a second mortgage).

Tue, 04/22/2014 - 10:09 | 4682449 NoTTD
NoTTD's picture

Financingbased on soy beans?  As Dr. Johnny Fever would put it, that's so weird even I get it.

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