China credit squeeze hits coal price

Saturday, 05 Nov 2011

According to producer and traders, Chinese private traders' struggle to open letters of credit during the past three weeks has been the primary cause of the 8% fall in coal prices seen since the start of October.

They said coal prices will not recover until China resumes buying in force. Thermal coal benchmark prices have lost nearly USD 10 a tonne since the start of October since China which had been almost single handedly absorbing the world surplus spot coal, stepped out of the market.

They said a similar pattern has developed in coking coal, iron ore and base metals buying.

Chinese coal importers often private companies who act as agents for a group of state utilities have continued to enquire for spot cargoes and have told suppliers they should be able to start buying again within a week or two.

China has been raising interest rates and banks' reserve requirement ratio to fight inflation. Premier Mr Wen Jiabao said on Tuesday it will remain the government's top priority.

Chinese importers said that a few of them have asked to delay shipments because of high stockpiles. The spot coal tonnage traded globally which drives the benchmark prices is a tiny portion of annual seaborne trade in excess of 750 million tonnes and but China buying this year of cargoes which had nowhere else to go has been a huge price influence without China, prices would have slipped a lot sooner.

China September coal imports were a record 19.1 million tonnes including over 900,000 tonnes from South Africa. October and November imports are expected to show a steep fall.

1. All imports hit

Mr Colin Hamilton Macquarie analyst said "Credit restrictions are affecting everything that is imported. He said that restrictions were more severe earlier in October but the situation is starting to ease now.”

He added that "The last couple of weeks have been tough for credit, they've really screwed it down banks are telling their clients they don't have enough cash for them to allow new LCs to be opened and without that, they can't buy, one major coal trader who supplies the Chinese market. It's starting to ease up now, but in another week or so we'll know if that is the case because buying will resume."

According to another supplier of large volumes to China importers want the coal and are mostly managing to open LCs just in time for shipment.

He said that "A month ago the were opening LCs 45 days prior to shipment and now its about 10 days prior quite tight timing but it's working and nobody's asked us to delay yet."

2. Shadow Banks Pressured

One major South African exporter said "This seems purely a credit issue, the shadow banks are having their wings clipped and people who are intermediaries for state end users need credit and at lease some of the coal bought and due to be shipped soon was financed by shadow banks."

He said that "Shadow banks lend at a higher rate of interest and then pass that on at an even higher rate and this sector is under pressure."

Companies which have been regular suppliers of South African, Colombian, Indonesian and Australian coal to China this year said the hiatus in Chinese buying did not seem to be a straight exercise to bring prices down before swooping in to buy on a large-scale.

One said "If they wanted to play price games then they'd say they couldn't open older LCs at higher prices but could open a new lower-priced LC and that's not happening."

However, the fall in prices which kicked in swiftly as soon as importers began to feel the credit squeeze is likely to be an accidental benefit for the importers.

Any cooling in Chinese commodity spot buying tends to give the suppliers who have grown to depend upon it a nasty shock but sellers are interpreting the current slowdown as temporary, citing steady enquiries for thermal, coking coal and iron ore.

Producers and traders said coking coal prices have also started to soften in the past month but the outlook is positive.

A UK based coking coal physical trader said "When the market sentiment changes coking coal will be one of the first commodities to see a strong price increase coking coal is in very short supply."

A European steel derivatives trader said "I don't think coking coal prices are going to have the same drop as iron ore prices did, I think that train has run its course."

(sourced from Vancouversun)