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Iron Ore Prices Tumble As China Crackdown Begins

Tyler Durden's picture




 

After the initial crash in many of the commodities backing China's shadow-banking system's ponzi, levels recovered modestly as rumors were spread of bailouts, stimulus, and in fact the exact opposite of what the Chinese government had declared it was trying to do. That ended for Iron Ore this weekend when, as The FT reports, China announced plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. Iron Ore prices tumbled overnight, closing near the lowest levels since Sept 2012 as it appears the PBOC and CBRC are serious and set to implement the tougher rules on May 1st.

 

 

As The FT reports, The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5 per cent on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.

Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing.

 

...

 

Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds. But the bulk and difficulty of transporting iron ore makes it a cumbersome material for raising money, limiting its flexibility as a financing tool compared with copper or gold.

But it's clear, the mills are unable to stop for fear of what the consequences are...

Data from the first quarter of the year show that China is on track to produce 822m tonnes of steel this year, a rise of 5.5 per cent from last year’s output, despite the rising debt levels, increased financing costs and the prospect of more environmental regulation.

 

...

 

Regulators are worried that the collapse of a heavily indebted mill could endanger a chain of local bank branches and even local governments, since steel mills are often the largest employers, taxpayers and debtors in their area. A case in point is Haixin Steel, also known as Highsee, which the local government in Shanxi province is trying to save.

 

...

 

The extra capacity flies in the face of a political campaign to close some polluting plants in Hebei province, which surrounds Beijing, to meet targets meant to reduce pollution around the capital. The trade-off for Hebei, which fears the loss of jobs and local tax income, is greater regional integration with Beijing and Tianjin, a large northern port city.

And therefore...

China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries.

 

The major problem, of course, is any restriction or tightening is necessarily lowering the price of the iron ore... thus reducing the value of collateral and thus worsening credit conditions in a vicious circle as firms can borrow less and less actual Yuan against  their inventory at a time when cash flows are becoming increasingly negative from demand collapse.

 

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Mon, 04/28/2014 - 22:31 | 4706321 InjectTheVenom
InjectTheVenom's picture

Ho Li Fuk !

Mon, 04/28/2014 - 23:07 | 4706395 caconhma
caconhma's picture

Tue, 04/29/2014 - 01:14 | 4706637 DoChenRollingBearing
DoChenRollingBearing's picture

 

 

More steel and lower prices make buyers of Chinese rolling bearings happy!  

:)

Tue, 04/29/2014 - 07:47 | 4707023 max2205
max2205's picture

Just imagine a dirty steel mill in every bigger city in the USA....oh wait

Tue, 04/29/2014 - 08:10 | 4707080 IndianaJohn
IndianaJohn's picture

Unlike an office full of clerks, steel mills actually produce manufactured goods. Real wealth.

Tue, 04/29/2014 - 09:51 | 4707451 twh99
twh99's picture

That is very true.  I am in the industry and we cannot make rollers for windows and doors competively compared to the prices we are seeing out there.

What everyone is forgetting is that the yuan has been slowly devaluating as well.

Tue, 04/29/2014 - 00:42 | 4706584 Schmuck Raker
Schmuck Raker's picture

I admit it... I downed you. It was old in the 70s. Yeah, I know it isn't you per se, it's just ..... boooooooooring.

Mon, 04/28/2014 - 22:34 | 4706325 AdvancingTime
AdvancingTime's picture

Corruption has been a huge issue within China for years now more problems are brewing. China has entered a great credit trap and is awash in overcapacity and debt. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system.

This money encouraged expansion and construction with little regard as to real demand or need.  After several years of growing debt concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. This is not just about writing off a few bad loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html

Mon, 04/28/2014 - 23:13 | 4706411 Tinky
Tinky's picture

a) you're never going to make a penny from your blog

b) your constant shilling has become extremely tedious

Tue, 04/29/2014 - 07:29 | 4706983 Wahooo
Wahooo's picture

c) all of the above

Mon, 04/28/2014 - 22:35 | 4706327 zorba THE GREEK
zorba THE GREEK's picture

China should just print more money and buy all the iron ore they will need for the next 50 years.

The U.S.S.A. is printing money to buy all of the debt in the U.S. and printing money to buy

stocks to keep the market up. It's F$%king insanity...What will be the outcome? I'm pretty

sure, it ain't going to be good.

Tue, 04/29/2014 - 03:35 | 4706798 Poor Grogman
Poor Grogman's picture

How about china just prints up some money to buy Australia, Africa, and assorted islands.

Oh hang on.....

Mon, 04/28/2014 - 22:41 | 4706348 Dr. Engali
Dr. Engali's picture

This is probably a good time for the iSheep to sell all they have, take their savings, and deposit it in their local bank. I mean if they are stupid enough to have it there at this point then they might as well go all in.

Mon, 04/28/2014 - 23:13 | 4706412 NoDebt
NoDebt's picture

Selling all they have?  What's that?  Like $2,600? 

"All they have" is whatever they have in their monthly running (checking) account.  "Rich" people like you are the problem.  You're evil.  Your unwillingness to share your obviously "unfair" wealth accumulation with other members of the collective is the proof.  So, we'll be around shortly to rectify that situation and lead you back to a more societally-acceptable existence.

You're welcome.

 

Mon, 04/28/2014 - 23:24 | 4706440 Dr. Engali
Dr. Engali's picture

Don't forget that $2600 can be leveraged up and re-hypothecated into about $500,000 Benny bucks.

Tue, 04/29/2014 - 06:40 | 4706925 Winston Churchill
Winston Churchill's picture

Sell early and often ,before May.Miss the crowds.

Mon, 04/28/2014 - 22:44 | 4706352 Advoc8tr
Advoc8tr's picture

At least our mining boom is still going strong ... albeit in the opposite direction  - Oz mining industry just went boom !

Tue, 04/29/2014 - 01:17 | 4706649 DoChenRollingBearing
DoChenRollingBearing's picture

If I understand correctly, Brazil's miners are not doing well either.

I wonder when Peru starts to feel China's slowdown...?

Mon, 04/28/2014 - 22:51 | 4706359 TheRideNeverEnds
TheRideNeverEnds's picture

Cool story; indicative of real economic slowdown.  That explains why the US futures are going straight up.

Tue, 04/29/2014 - 01:15 | 4706646 disabledvet
disabledvet's picture

Um...thank you whoever did that...and if the Government is getting tough on steel mills why is the price falling?

Tue, 04/29/2014 - 03:56 | 4706810 Jadr
Jadr's picture

Is your question asking why the price is falling for iron ore or for steel?  If your question is re:ore it is as the article depicts and other articles have alluded to. These companies were collateralizing loans using the iron ore.  If they can no longer use it as collateral then they will be purchasing less while the ore suppliers have likely not adjusted their output.  Part of the decrease in price could be due to some Chinese entities having to sell their ore to pay off loans which would reduce the price.  I haven't looked at the price of steel but if the price on steel is declining as well then it's the story of over capacity in China and reduced demand in China and abroad.  If they shut down the steel production then eventually the steel prices will rise as the supply and demand readjust unless the demand drops faster than their reduction in production.

Tue, 04/29/2014 - 01:16 | 4706647 Peter Pan
Peter Pan's picture

Australia's golden haired performance since the GFC was based on the twin fantasy of strong mineral exports as well as increased borrowing by both government and individuals which created one off increases in GDP but everlasting debt.

The chickens are now coming home to roost so the fiscal slopiness of the previous government is going to hit Australian's really hard when they discover that the locks have been shorn off Goldilocks.

Tue, 04/29/2014 - 01:58 | 4706699 q99x2
q99x2's picture

Jim Rickards is on Coast to Coast am.

He's challenged. Fast talking salesperson.

Tue, 04/29/2014 - 06:04 | 4706903 Fast Twitch
Fast Twitch's picture

Starting to wonder if Rickards himself is also part of the Pentagon's strategy. He speaks about gold as being the achilles heal of the West, and he has the opponents buying into his views, (claiming the west is ready collapse), meanwhile the Pentagon does the opposite. Lately Rickards has been on every continent bashing his homeland and you never hear him complain about the TSA. And strangley amidst all the global conflicts happening realtime, gold is going down not up. It's looking more like the gold market as with every other market is being managed, (which we at ZH know), but we're underestimating the extent of the global reach of the Pentagon. Time will tell. The present Fed news releases to be announced today and tomorrow will add to this observation that Rickards is himself a high tech weapon, bent on mis direction of information.

Tue, 04/29/2014 - 07:32 | 4706988 Wahooo
Wahooo's picture

Well, he was under contract with them.

Tue, 04/29/2014 - 02:47 | 4706765 Gideonzsword
Gideonzsword's picture

I smell a deliciously cooked Chinese fish here. I think the PBC, already well aware of the commodity-funding deals, are picking and choosing which commodities to crack down on in order to manipulate prices in an orderly manner so that they can gradually bring more effeciency to China's economy. The intention is to leverage the liquidity of international commodities markets to give their industries in flux a softer landing and save them the trouble of having to waste a bunch of RMB on bailouts and stimulus.

Tightening the credit lines while simultaneously pushing down prices in the market, gives the Chinese the luxury of picking and choosing which Steel Mills die (no more LOCs) and which get to survive thanks to cheap or otherwise stabilized spot prices. 

Tyler has already proved they are activley manipulating the gold price and we've seen Soybean companies with the teremity to actually DENY contracts they've signed for along with the ongoing GMO refusals.

Not suggesting a grand conspiracy theory but rather a series of economic interventions designed to "cool" the economy off without the downside of a hard landing.

I see the opportunity for some GREAT options positions in the near future.

Tue, 04/29/2014 - 05:18 | 4706859 Bastiat
Bastiat's picture

So this trade has caused precious metal prices to go down in recent years therefore unwinding the trades will cause prices to go down more?

 

Tue, 04/29/2014 - 05:44 | 4706877 medium giraffe
medium giraffe's picture

Not going to take much more before the RMB really starts to fall out of bed.

Tue, 04/29/2014 - 07:57 | 4707045 youngman
youngman's picture

I am going short on Austrailia housing...that boom is probably over

Tue, 04/29/2014 - 09:41 | 4707397 post turtle saver
post turtle saver's picture

I would short any consumer activity in commodity dependent economies. Look out below...

Tue, 04/29/2014 - 12:49 | 4708338 TPTB_r_TBTF
TPTB_r_TBTF's picture

that strategy will get stopped-out

in any commodity-dependent economy with a printing press.

Tue, 04/29/2014 - 08:04 | 4707065 IndianaJohn
IndianaJohn's picture

Last week I was paid $200 per ton for clean steel scrap, at the local yard. This was down from $240 last summer. Whole cars also pay the same as clean scrap does at the same yard.

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