The Dalian Commodity Exchange is open and iron ore futures have resumed their slide, down another 1% at the open with a small rebound. Rebar futures have held up. Major iron ore miners are following Dalian down, off 1-2% and dragging the ASX into the red.
More importantly, the dollar seems to also being dragged in this time around, tracking shares lower this morning:
Here’s a reminder of why from the FT:
The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5 per cent on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.
Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing. Part of the attraction of the practice is that mills benefit from lower international interest rates compared to those in China.
Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds. But the bulk and difficulty of transporting iron ore makes it a cumbersome material for raising money, limiting its flexibility as a financing tool compared with copper or gold.
Regulators are worried that the collapse of a heavily indebted mill could endanger a chain of local bank branches and even local governments, since steel mills are often the largest employers, taxpayers and debtors in their area. A case in point is Haixin Steel, also known as Highsee, which the local government in Shanxi province is trying to save.
“Because of the difficulty getting funding, steel mills need to think of all types of methods including letters of credit. We do not think this is against any regulations, they need to do what they need to do,” Qu Xiuli, vice secretary-general of the China Iron and Steel Association, told reporters on Monday.
Clearly authorities disagree and appear determined to restore discipline to the steel sector. Broader markets are waking up to it.
