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Coming in the backdrop of waning steel demand and slow off take in China which is already stooped in inventory piles the paradox in inexplicable but for the fact that traders have been aggressively using iron ore stocks as collateral to eke out loan from banks and private trading houses.
Chinese steel mills and traders are buying more iron ore to use as collateral to secure loans. Beijing's tightening of lending in sectors plagued by overcapacity such as steel has made it harder to secure bank loans, spurring financing demand for iron ore.
Robust Chinese imports are supporting prices and underpinning expansion plans at top miners such as Vale, Rio Tinto and BHP Billiton.
But there is also a risk that Beijing could crack down on the practice and take out a big chunk of demand rapidly. Steel mills and traders tend to lose their financial support from banks if they stop importing.
Steel mills have turned to Chinese state-owned enterprises for funding by pledging iron ore as collateral which they are able to free after 6 months once they sell off finished produce.
It is bubble which is ready to burst in due course of time and make the steel and iron ore market even more brittle. It won’t be surprising if Beijing comes down heavily on such practices by easing the lending rates and making credit easier lest risk another reality sector like bad debts and fragile bulge.
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- [Editor:editer]
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