Chinese buyers default on coal, iron ore shipments

Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world’s second-largest economy is hitting its appetite for commodities.

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Chinese buyers default on coal, iron ore shipments

Reuters, Bloomberg
22 May 2012

Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world’s second-largest economy is hitting its appetite for commodities.

China is the world’s biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade.

Coal and iron ore prices could fall further before recovering towards the tail end of the second quarter, sparking more defaults or deferred deliveries.

‘There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren’t buying because they have a lot of coal and traders are also afraid of getting burnt. It’s very bearish now,’ said a trader.

The defaults in thermal coal over the past week have come after a fall in prices over the past 11/2 months, with key coal price indices in Australia, South Africa and Europe having fallen around US$10 a tonne since early April.

At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa.

‘Many of them signed for the spot cargoes in early April and prices have fallen around US$10 a tonne since then.’ Some Chinese traders were suffering a loss of nearly US$1.5 million for each shipment, said a trader at an international firm who has been offered defaulted cargoes.

‘That doesn’t even take into account the losses on freight rates. So rather than being bankrupted by these deals, they would rather dishonour the contract to survive.’

Sellers of imported iron ore in China have slashed price offers as weak demand continued to weigh on spot steel prices, opening up more downside room for iron ore after a fall of nearly 5 per cent last week. According to Chinese consultancy Umetal, prices slipped by as much as US$2 per tonne yesterday.

Global and Chinese crude steel production growth was also sluggish last month as steelmakers adjusted their output to weaker demand and falling prices in what should be the most active period of the year, data from an industry body showed.

Global steel production rose by only 1.2 per cent in April compared with the same month last year, to 128 million tonnes, according to data released yesterday by the World Steel Association (Worldsteel).

Steel output in China - the world’s largest producer and consumer of the alloy - rose by 2.6 per cent to 60.6 million tonnes in April.

Global steel consumption growth will slow this year, hit by weaker economic growth in China and uncertainties about the debt crisis in the euro zone, according to Worldsteel’s forecast.

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