Chinese
Purchasers Default on Commodity Contracts
Chinese
buyers are either deferring or defaulting on iron ore and coal
purchase contracts as inventories in China rise and prices fall. At
the end of last month, there were at least six thermal coal
cargoes—from the United States, Colombia, and South Africa—affected
by these defaults
3
June, 2012
Moreover,
Chinese steel mills are now postponing purchases of iron ore,
especially from Brazil’s Vale. Purchasers in China have been
seeking to delay deliveries of the commodity since October.
Similarly,
Chinese copper purchasers are re-exporting cargoes, and since March
they have been postponing deliveries.
What’s
going on? There are two theories. Some think China’s buyers are
defaulting to take advantage of lower prices. According to this
theory, they will re-book cargoes soon, something they did in 2010.
In
2010, Beijing claimed GDP growth of 10.4%, and the actual rate was
probably higher. This April, however, the story was different.
Growth was at best zero that month, and initial indications for May
tell us the economy continued to deteriorate. Tumbling growth rates
mean the second theory—Chinese enterprises cannot use all the
commodities the country has purchased—is the far better one.
You
don’t need to be an economist to find evidence of China’s sudden
deceleration. In the port of Qingdao, warehouses are so full that
workers are stockpiling iron ore in granaries. In Shanghai, they are
putting copper in car parks.
The
inventory of copper in bonded storage in that city is twice the
300,000 metric ton average of the last four years. Zhang, the
manager of a bonded warehouse in Yangshan Port in Shanghai, notes
that the turnaround for copper used to be one or two months, but now
it is at least six. “The destocking is happening very, very
slowly,” he told Reuters.
And
it’s no mystery why copper is moving out of the port at snail
speed. “New orders have slowed quite substantially from a year
ago,” says a manager at a large Chinese factory making copper
tubing. “With demand so weak, we’ve scaled back operations, shut
one production line and reduced the number of shifts.”
Copper
is not the only metal that’s sitting in Shanghai’s port. There,
stockpiles of iron ore are a third larger than the average 74 million
metric tons.
Need
more proof of falling iron ore demand? Chinese steel traders have
committed suicide, and BHP Billiton, the world’s biggest miner, put
its iron ore and copper expansion plans, recently announced to meet
Chinese needs, on hold. Rio Tinto, the other giant Anglo-Australian
mining concern, is following suit.
The
problems are reflected across the Chinese manufacturing sector. The
HSBC/Markit PMI for May took a tumble, falling from 49.3 to 48.4.
The big decline was mirrored in the semi-official index from the
China Federation of Logistics and Purchasing, which plunged to 50.4
from April’s 53.3. The magnitude of the change in Beijing’s
index took analysts by surprise.
Should
we worry? Yu Song of Goldman Sachs says manufacturing activity is
not as weak as the PMI data suggests, but that assessment appears to
be just more cheerleading from sell-side institutions, which have
made few correct calls on the Chinese economy this year.
Analysts
are loath to acknowledge that China’s economy has hit an inflection
point. In this new environment, Beijing’s stimulus program,
contained in a series of recent announcements, appears insufficient
to have a lasting effect. Of course, the expansionary measures could
lift the country’s requirements for commodities, but that bounce
probably will not occur until the next quarter and be short-lived at
best.
In
the meantime, China remains moribund. As Reuters implies, stationery
cargo trains in Qingdao’s port are a telling indication of the
current state of the Chinese economy
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