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

Tyler Durden's picture




 

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."

 

 

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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Fri, 06/13/2014 - 11:27 | 4853029 Awakened Sheeple
Awakened Sheeple's picture

Sucks for traders. Good for the real economy.

Fri, 06/13/2014 - 11:31 | 4853040 RadioactiveRant
RadioactiveRant's picture

Not if you're an Aussie digging it out of the ground, or a gook thats about to lose his head.

Fri, 06/13/2014 - 11:33 | 4853065 Dr. Engali
Dr. Engali's picture

They've had it good on phoney prices for years now. A little dose of reality will do them good.

Fri, 06/13/2014 - 11:35 | 4853078 RadioactiveRant
RadioactiveRant's picture

Have some pity for Gina Rinehart, she works hard for her living.

Fri, 06/13/2014 - 11:43 | 4853118 rtalcott
Fri, 06/13/2014 - 11:46 | 4853138 tmosley
tmosley's picture

Burning paper is good kindling for the coming financial holocaust.  Hope you're ready, bitchez.

Fri, 06/13/2014 - 11:43 | 4853119 rtalcott
rtalcott's picture
Fri, 06/13/2014 - 14:22 | 4854249 RockRiver
RockRiver's picture

Well.....she eats well anyhow....

Fri, 06/13/2014 - 11:44 | 4853128 Awakened Sheeple
Awakened Sheeple's picture

Pity the miners, too. They're about to get railed as hard as the consumer has.

Fri, 06/13/2014 - 11:30 | 4853047 LawsofPhysics
LawsofPhysics's picture

Multiple paper claims on the same iron ore (definition of a ponzi) and the price is going to go down?

 

What's wrong with this picture?

Fri, 06/13/2014 - 11:32 | 4853060 RadioactiveRant
RadioactiveRant's picture

Surely the contraction in capital will also lower "real" demand, driving prices down. If people run out of money to buy apartments in empty cities, they won't need the steel and copper for the construction.

Fri, 06/13/2014 - 11:37 | 4853077 Dr. Engali
Dr. Engali's picture

All those claims are worthless and the defaulting entity doesn't have the 'money' to make good on the claims. No 'money', no demand for the commodity.

Fri, 06/13/2014 - 11:38 | 4853094 SWCroaker
SWCroaker's picture

Wrong, maybe.  I guess I can see that if a class of paper contracts is all suddenly suspect, holders of those contracts might all rush to offload them asap, encouraged strongly no doubt by anyone who lent money to them.

It raises the question: is this how it is gonna be in the PM markets, when the realization of rampant fraud becomes widespread?  "There IS no gold; would you like to buy my COMEX contract?  10% discount if you buy today!"

Fri, 06/13/2014 - 11:42 | 4853110 Dr. Engali
Dr. Engali's picture

The difference in PMs is that there has been a great deal of effort in price suppression. When the PM paper ponzi collapses we will see a whole different response.

Fri, 06/13/2014 - 11:44 | 4853114 Dr. Engali
Dr. Engali's picture

Dupe...sorry. Apparently I'm a fat fingered retard.

Fri, 06/13/2014 - 11:43 | 4853115 RadioactiveRant
RadioactiveRant's picture

Secondary effects are also hard to get a hold on. People have been borrowing this money to fund something, and whatever that is will deflate as whoever is left chasing "it" is in a market with less cash and fewer bids. Have they been buying real estate in empty Chinese city/London/Aus/Can, widget factories, stawks, bonds,..?

Fri, 06/13/2014 - 11:43 | 4853122 Flakmeister
Flakmeister's picture

'zackly....

There will be an extraordinary oppurtunity to buy the miners then....

Fri, 06/13/2014 - 13:42 | 4854033 Poundsand
Poundsand's picture

People aren't dumping actual ore, they are dumping worthless pieces of paper representing ore that doesn't and never has existed.  If you have the real stuff, you are just sitting back and waiting for the fall-out to subside. 

Fri, 06/13/2014 - 16:26 | 4854736 Flakmeister
Flakmeister's picture

Assuming that you aren't also getting margin calls...

Don't think for minute that if the paper gold market tanks that the miners will not get hammered in a knee jerk sell off..

Fri, 06/13/2014 - 19:44 | 4855317 mrpxsytin
mrpxsytin's picture

Say a smart looking young man offers to sell you a quarter share in a luxury yacht. You've always wanted your own boat and this way you can actually afford it. So you hand over $500k and he gives you a key and promises you that he will be able to find someone to buy your share if you ever decide to sell.

You get together with the other three owners and take your new boat out for the day. It's fantastic. 

A few month's later your sitting in the yacht club and notice a group of four strange men hopping in to your yacht and taking it out for a cruise. You wait in the club for them to come back and ask them what they were doing with your yacht. They explain that they have just bought the yacht in four equal shares. 

Now at that point has your quarter share risen ornfallen in value? If there was an open market in quarter shares for this yacht, what would this news do to the price?

Fri, 06/13/2014 - 11:32 | 4853057 Dr. Engali
Dr. Engali's picture

Keep it up and we may find real pricing in this world. I know.... I'm an optimist.

Fri, 06/13/2014 - 11:34 | 4853068 Peter Pan
Peter Pan's picture

All turds big and small eventually get flushed.

I love the smell of financiers shitting themselves. LOL.

Fri, 06/13/2014 - 11:37 | 4853092 disabledvet
disabledvet's picture

These prices have in fact collapsed. We're not looking at slowing growth but plunging into an outright deflation and massive debt crisis at the Staye and local level.

Simply put the failure to respond to a phased withdrawal plan by going into Syria thus allowing an honorable withdrawal of US forces from the bulk of the Middle East has now exploded into Total War and "debt defeat" as anyone who so much as has aGovernment job....let alone pension...is sitting in the "financial crosshairs of the Final Solution."

Since the retaliation for "Fifth Columnists" proceeds apace the bulk of the folks "invested" in this prima facie attack on the Republic are gonna wish they were dead...if not they are in fact they do not become so.

Fri, 06/13/2014 - 12:29 | 4853473 cro_maat
cro_maat's picture

You lost me at "honorable withdrawal". There is nothing honorable about the US presence in the Middle East.

Fri, 06/13/2014 - 11:56 | 4853229 NOTaREALmerican
NOTaREALmerican's picture

Quick, Monitary Man, to the printing presses !

Fri, 06/13/2014 - 12:10 | 4853300 novictim
novictim's picture

This news about China's phony economy is not making the mainstream American news shows.  

It is so important and effects so many elements in people lives from their mutual funds and jobs you would, therefor, think it would reach the headlines.

Was that naive?

In any case: Good Job Zero Hedge!  Keep it up!

Fri, 06/13/2014 - 12:13 | 4853348 apberusdisvet
apberusdisvet's picture

Regarding the comments on miners:  when the SHTF, it is most probable that all miners, especially PM ones, will be nationalized by the host country.  Not for nothing is the line item "deep reserves" on the US Treasury balance sheet.

Fri, 06/13/2014 - 12:19 | 4853391 toadold
toadold's picture

"Will Tim, I'm sure glad nothing like this is happening in the US...Tim...TIM!.....Say has anybody seen Geithner?"

"So Mz. Yellen that's a gallon of Vodka, two quarts of Jack, and the nearest drug store is two blocks down right next to the coin store."

Fri, 06/13/2014 - 12:32 | 4853505 NoWayJose
NoWayJose's picture

"Banks are trying to determine if individual batches of commodities were used to secure multiple loans" -- bankers always were a little bit slow to see anything under their noses.  Of course the inidivdual batches were -- and guess what -- during the Audit, those same individual batches will be used to 'prove' that there is a separate batch for each loan.  All it takes is scheduling the 'viewing' so that each of the 7 banks with claim to that batch of commodities does not come to see it at the same time.  Any temporary price drop is most likely due to a few banks terminating their loans and asking for immediate repayment.

Fri, 06/13/2014 - 12:59 | 4853734 WMM II
WMM II's picture

shows the 'value' of speculators (those who don't take delivery). a gimmick to steal more from everyday people under the auspices of 'banking'.

 

 

:)

Fri, 06/13/2014 - 13:46 | 4854070 Jack Burton
Jack Burton's picture

Well, this looks bad for my area, since my town is a major Iron Ore shipping port with a railroad running down here from the mines. I drove by the local ore processing plant, where low grade is turned into high grade pellets. We noticed that all the furnaces were shut down and the pellet yard was full from one end to the other, also no ships were in the loading dock. I wondered what was up, now I know.

Fri, 06/13/2014 - 15:05 | 4854437 juggalo1
juggalo1's picture

But I thought Zerohedge was complaining about all the inflation in essential commodities, or is iron ore now in the same class as I-pods and other consumer goodies?

Fri, 06/13/2014 - 22:19 | 4855712 Wild Theories
Wild Theories's picture

The story of mining has always been a boom-bust cycle, nothing new here.

Fri, 06/13/2014 - 17:22 | 4854922 strangewalk
strangewalk's picture

This big farce, not possible happen China--bless with sublime and profound, exquisite culture have 4, I mean 5, or 6, maybe 7 thousand year ancient magnificent civilized...Great Helmsman look down from all lofty, sacred place even. Filthy, corrupt pig round-eye just try give China loose face. White devil, dirty Goldman Sach food-stamp Obamar feed evil dog, you all go hell.    

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