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Iron Ore Futures Drop in China Amid Reports of Financing Curbs

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April 28, 2014

April 28 (Bloomberg) — Iron ore futures in China, the biggest buyer of the steel-making commodity, fell the most in more than a month after a report that banks will raise the cost of financing for purchasing the raw material.

The contract for September delivery on Dalian Commodity Exchange retreated 4.4 percent to 760 yuan ($122) per metric ton, the largest loss since March 10 and lowest close since March 27. Steel reinforcement-bar and hot-rolled coil futures also declined.

Banks will increase the size of deposits required “by large measure” from May 1 for letters of credit used to finance purchasing iron ore, the Guangzhou-based Southern Metropolis Daily reported, citing sources it didn’t identify. Iron ore stockpiles at Chinese ports jumped to a record amid demand to use the ingredient as collateral to get credit while spot ore prices declined 17 percent this year.

“If traders are unable to get more financing, they may sharply cut prices on the inventory they hold to obtain cash, and that will cause ore price to plummet,” Ren Xinlei, an analyst at Luzheng Futures Co., said today by phone from Jinan.

The China Banking Regulatory Commission has issued a statement asking banks to report exposure against iron ore import financing and warned them about the risks, Market News International reported. The Beijing-based regulator declined to comment when reached by Bloomberg News via phone.

China is studying the default risks to companies that use iron ore as collateral to obtain financing, and may warn banks about the dangers of lending money in such cases, people with direct knowledge of the matter said last month.

Steel reinforcement-bar for October delivery on the Shanghai Futures Exchange lost 1.7 percent to close at 3,222 yuan a ton, the most in a week. Hot-rolled coil for the delivery in the same month closed 1.2 percent lower at 3,336 yuan, the lowest since March 24.

Copyright 2014 Bloomberg.

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