Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge

Tyler Durden's picture

One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.

From Reuters: "Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world's second-largest economy is hitting its appetite for commodities. China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. "There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren't buying because they have a lot of coal and traders are also afraid of getting burnt. It's very bearish now," said a trader. The defaults in thermal coal over the past week has come after a fall in prices over the past 1 1/2 months, with key coal prices indices in Australia, South Africa and Europe all having fallen around $10 a tonne since early April." And this is the country that over the weekend was rumored to be bailing out the world again? We wonder: will China also bail out FaceBook longs, or will it merely focus on preventing a collapse in its own various commodity bubbles which are starting to pop one after another?

More from Reuters:

At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa.

 

"Many of them signed for the spot cargoes in early April and prices have fallen around $10 a tonne since then. Say if the Chinese traders were buying a cape-sized shipment, they'd be suffering a loss of nearly $1.5 million alone," said a trader at an international firm who has been offered defaulted cargoes.

 

"That doesn't even take into account the losses on freight rates. So rather than being bankrupted by these deals, they would rather dishonour the contract to survive."

 

China's premier called for additional efforts to support growth on Sunday, signalling Beijing's willingness to take action to bolster its sagging economy.

And if the Chinese commodity appetite is over, that means very bad news for commodity exporters the world over:

Reflecting greater caution, BHP Billiton, the world's biggest miner, has put the brakes on an $80 billion plan to grow the company's iron ore, copper and energy operations.

 

Slumping commodity prices and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto reconsidering the pace of their long-term expansion in countries such as Australia and Canada.

For another perspective of just how stuffed to the gills with commodity inventory is we again go to Reuters, which gives us the following scary summary:

When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

 

At Qingdao Port, home to one of China's largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted "grains storage" and almost to the street.

 

Further south, some bonded warehouses in Shanghai are using carparks to store swollen copper stockpiles - another unusual phenomenon that bodes ill for global metal prices and raises questions about China's ability to sustain its economic growth as the rest of the world falters.

 

Commodity markets are used to seeing China's inventories swell in the first quarter, when manufacturing slows down due to the Lunar New Year holidays, and then gradually decline during the second quarter when industrial activity picks up.

 

This year, however, is different.

 

Copper stocks in Shanghai's bonded storage, the biggest in China, are now double the 300,000 metric tons (330,693 tons) average of the past four years and iron ore stocks are about a third more than their 74 million metric tons average.

This time may be differernt indeed:

Four years ago, however, the global financial crisis triggered by the collapse of Lehman Brothers broadsided the economy: factories shut down suddenly, millions of workers got laid off, ports ground to a halt. The situation only perked up after the government introduced a $600 billion stimulus scheme.

Probably the biggest difference is that back then Europe wasn't broke and the US debt/GDP was well below 100%. Both of those are no longer the case.

And to think we were wondering just last week if the biggest construction bubble in history was sustainable.

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GeneMarchbanks's picture

Australia is not a bubble, now just repeat...

idea_hamster's picture

Rats -- so my jar of copper pennies just took ANOTHER hit to its value?!  Man, I can't catch a break!

Harlequin001's picture

Send a gunboat. It worked last time.

hedgeless_horseman's picture

 

 

Same shit happening in Houston with brand new oil and gas rigs...

 

Anybody up for some impulse shopping?

Harlequin001's picture

Whatever the price it will be a damned site cheaper very soon in terms of gold...

The Big Ching-aso's picture

 

 

I gotta feeling the trajectory of lead is gonna go flat, with hi-velocity, but I'm probably making a hollow-point here.

Abitdodgie's picture

Good news for silver ,it is mostly a by-product from mines , well if you are not producing, then silver should start to get in tighter supply.

Harlequin001's picture

But it only costs $5 to mine it...

ArgentoFisico's picture

Average silver cash costs at primary mines were $8.28 per ounce in 2011.

http://www.mineweb.com/mineweb/view/mineweb/en/page32?oid=151629&sn=Detail&pid=102055

Michael's picture

There is nothing in the known universe that can stop the epic Chinese housing bubble from popping. Tuff Shit.

urbanelf's picture

But how will I kill all the werewolves?

Harlequin001's picture

Well Big Ching, the problem is that you might end up with more lead than you know what to do with...

literally, and possibly mixed in with a bit of plutonium...

But that's good for you, or so I'm told...

Element's picture

2 for the price of 1 is coming back.

SWRichmond's picture

Commodity price collapse is a prelude to QE3, the people will demand it, the central banks will be off the hook, it won't have (publicly at least) been their idea.  I feel sorry for anyone who didn't see this coming.

Relax, strong hands, popcorn.

chumbawamba's picture

Exactly.  This is a 2008 redux.  Back then, all commodities, especially base metals, got taken behind the woodshed.  Scrappers this side of the Pacific were saying they'd never experienced anything like it.  Buyers simply reneged on their contracts (all done verbally as per custom).  The industry got slaughtered.  It was a particular stressful time for Chumba.  Prices for scrap metas didn't recover until about mid-2009.

Now it's rinse and repeat.  Scrap prices have been tanking lately, and we're probably close to a swooning plunge, though it'll probably happen in the Fall as these things usually happen in that appropriately named period of time.

Pretty soon the Bernankenstein will have to act.  Watch gold and silver.

I am Chumbawamba.

caconhma's picture

"Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge"

May be this is exactly what Chinese are deliberately doing: driving commodity prices down! Here Chinese, American, and EU interests are in line.

However, based on the G8 statement about the US intention to release oil from strategic reserves, there is no free/spare oil to go around.

Consequently, this commodies created plunge will not be long living event.

One thing more. To make  yuan a world reserve currency, Chinese will have to tie it to the gold.

onelight's picture

Good point.

Time was...only a couple years back...there was an army of US guys selling all our factory and machinery offshore, stripping the infrastructure of American manufacturing and to a lesser extent, drilling, although natty gas kept that going. 

In the decade prior, it was all being e-Bay'd, all the high school shop class machinery, as Americans thought white collar employment, as engrossed in intangibles as it so often is, was better than using and being proud of, the work of one's own hands

... as described in Shopcraft as Soulcraft -- http://matthewbcrawford.com/

Now who will buy? Maybe we should value what we have a little more...it took a lot of work to get it..

Snidley Whipsnae's picture

Since there are few pure silver play mines this could be interesting for silver prices... depending on a continued strong demand for solar collectors, etc.

Where is all the 'pent up demand' blab usually heard at this point in global slow downs?

I'm seeing lots of worn out, noisy, squeeky, clunky autos on the roads these days. Soon they will be parked on the side of the road if they are not maintained.

Ya can't make, or repair, cars without commodities...

 

Magnum's picture

I used to be in this business, and it happened all the time.  Price could go way up after shipment departed, and the seller would shop the container around to other buyers, screwing over the guy who wanted it in the first place.  

LawsofPhysics's picture

You are correct.  In the real world where people actually have to produce a real product, input commodities have to be delivered.  There are far too many paper-pushing fucking idiots involved stealing wealth.  These people produce nothing and add no real value.

End this fucking sham and make margins on all commodities 100% already.  Fuck the paper-pushers, once again they will cry, scream, and stomp thier feet like little children if they can't keep stealing wealth from the people who actually add real value to the system.  They will threaten financial ruin for us all.  Fine, fucking bring it, time to cut out all the useless fucks from this corrupt ball of shit.

Long black markets, personal armies, and all things physical.

catacl1sm's picture

Some would argue that paper-pushing 'speculators' do indeed push prices higher during good times, but also provide a softer floor in lean times. I'm just saying.

The Big Ching-aso's picture

 

 

Well, it's all a matter of balance.  Rite now speculation is phucking up R bank balance really good.

hannah's picture

@catacl1sm   we wouldnt have such massive swings up and down every 5 or 10 years if we didnt have a 'paper' economy. the bogus paper markets magnify the up and down periods.

 

does your 'softer floor' mean that taxpayers bailout the tbtf banks behind the loses...?

Theta_Burn's picture

In this case the "buyer" is screwing the seller, the shipper, and most likely the bank... how do you say "cash in advance" in Chinese?

My father yrs ago was also in this buisness, with UAE and Kuwait the prime customers (1rst gulf war destroyed the Co.) usually a bill of lading, with funds already exchanged was the norm.

 

Magnum's picture

Bill of Lading is generated after the shipment departs, you may be referring to Letter of Credit which is irrevocable.  

Business now is you have longstanding relationships, the customer says send me this coal, or whatever it is, at an agreed price.  Everything is great until some big price shock happens, things get dicey for a short time then everything goes back to normal.

What happens is that usually a seller has a few different buyers.  One buyer wants a load of coal and says $XX per ton.  Next thing you know, the price goes way down and the buyer says SHIT I can't pay that--give me a discow or I refuse to take it!!  Or, they just disappear, in that case the seller has what is referred to as a "floater", and the seller surely gets screwed because at this point he calls his most honest customer at destination who agrees to work it on consignment, this ruins the market price temporarily.

On the other hand, sometimes price goes WAY UP after the price is agreed.  Almost always the seller follows through and ships and takes the agreed price.  Sometimes the seller makes up a story and says well, really, that cargo never loaded for blah blah reason.  The seller then calls up his other customer and gets a higher price.  These are the things that damage relationships but they happen.

chinaguy's picture

bill of lading generally generated 2-3 days before the ship departs - at least w/ COSCO... just make sure your stuff is not in the front of the loading cue

Magnum's picture

No that is not how it works.  We were operating in high volume and had in-house freight forwarders.  We were doing hundreds of shipments per month, barely making late gate at the port for every vessel.  Fast pace, you could get an order at 10:00 AM and have it in port by 3:30 PM and sailing the next day.  BL generated within 7 days of sailing, sometimes faster, never before sailing unless we were shipping to like Bangladesh or some crazy place with no history, and then it was very tedious, time-consuming, letter of credit stuff.

indygo55's picture

"How do you say cash in advance in Chinese?"

 

Uh,  CIA?

 

slewie the pi-rat's picture

yeah, magnum, i wouldn't worry;  the "story" that they will be BK if they don't do this is just an invitation to settle, imo

there is a glut, here;  and it may be that in china's "resource aquisitions for the future" they have created a monster of sta-puff dimensionalities

the japanese are gonna love this fuking movie!

Magnum's picture

This all brings back great memories and I feel like I should be back in the saddle again.  What the seller really wants for poetic justice, and I have seen this before (rarely), but you find some other market to sell the shipment.  Let's say you find some company in Venezuela or Singapore, they agree to buy it all at the asking price.  NEXT the original buyer in China who said last week he needs a big discow is SCREAMING and BEGGING to get it back at the original price.  This does happen...

AustriAnnie's picture

"the seller would shop the container around to other buyers, screwing over the guy who wanted it in the first place"

China is known for placing very high value on business relationships and holding to contracts.  I wonder how bad it must be for them to risk their reputations by defaulting.  From what I hear from Chinese friends, many would prefer to take a hit financially than to lose face by reneging on a contract. 

twh99's picture

Obviously you have never dealt with Chinese companies before.  They will screw you blue if you let them.

AustriAnnie's picture

Like I said, I"m going by what I've heard from people doing business there.

Though, I assume there is a double standard.  They probably will screw over a westerner, but not their own.

Magnum's picture

AustriAnnie that is true but there are exceptions.  Prices crash...  Someone has a shipment coming and the price has dropped 60% since loading,,,, things change.  Overall the Chinese traders we dealt with were as you describe.  Excellent business people to work with.

chinaguy's picture

You are a fucking idiot if you ship ANYTHING to China w/o payment upon shipping docs before the damn thing loads & ships.

Magnum's picture

You must not be in the business!  We were doing over US$200M per year trade with Asia and none of it, not a penny, was pay in advance.  Most was pay 30 days after shipment.  Some 7 days after shipment.  Others we sent docs via bank so the customer had to pickup the documents at his bank, and make payment at same time, before ship arrived.  Indonesians were notorious for bad pay so they had the strictest terms in Asia, but still it was pay after ship departs.  Within N America nothing was shipped to MEXICO without pay in advance.  I'll grant you that.

So jump up and down and scream all you want about fucking idiots.  I am no longer in that business but the company I worked for is doing more business now than ever.

The Swedish Chef's picture

People shpuld buy more IGadgets to log on to Facebook. A world of trouble would have been avoided if people just heeded this simple instruction.

catacl1sm's picture

I've already heard people decrying the addition of ads to FB's mobile platforms. What did they expect?

The Swedish Chef's picture

What they expect? Everything for free. Or perhaps that they could live shielded for ever from the insight that on Facebook, the user is the product. 

markar's picture

Oh the thunder down under!

midgetrannyporn's picture

China, the billionaire's bestest friend.

Cognitive Dissonance's picture

The check is in the mail. Promise.

Stackers's picture

What ? You mean China isnt building a bridge to nowhere every week and another world's largest shopping mall with 3 open stores in it anymore ? What they really need is another ghost city out in the middle of the most remote and driest desert on the planet. That'll do it.

The Swedish Chef's picture

Yes, they are. It´s the second weekly bridge to nowhere that has been cancelled.

Not Too Important's picture

Well, at least California is doing their share with the multi-billion dollar Bullet Train To Nowhere.

C'mon, boys and girls, ask Engineer Jerry if you can blow the whistle!

While his sister who works for the Squid sells the bonds. All In The Family! Now, who's the Meathead???

CreativeDestructor's picture

Anyone interested in understanding what's going on with china and more read Www.mpettis.com
Guy is an economics and concise writing genius.

CreativeDestructor's picture

Anyone interested in understanding what's going on with china and more read Www.mpettis.com
Guy is an economics and concise writing genius.