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) [8]. 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."
[9]
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).
[10]
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.
