REUTERS
Posted: Monday, Aug 27, 2012
Launceston: One of the most bearish signals regarding China's commodity demand has been several reports of iron ore and coal cargoes being deferred or cancelled.
The reasoning is sound enough; if the Chinese are defaulting on imports of commodities it must be because demand is down and there is little need for volumes that had been bought when the outlook was stronger.
But there is reason to question just how bearish these defaults are for the overall picture of Chinese commodity demand.
Part of the answer is that this is how Chinese traders and companies conduct business.
They are unafraid to cancel of defer imports if they can buy alternative supplies on the spot market at cheaper prices, or if they feel that a better deal can be renegotiated.
However, let's be clear about the overall level of demand.
While Chinese commodity demand has held up exceptionally well in the first seven months of the year, it does appear to be easing currently in line with slower growth in industrial output.
It's just that the reports of cargoes being deferred and cancelled make the situation sound more alarming than it may actually be in reality.
A Reuters report on July 27 said Chinese coal traders had scrapped import deals for two million tonnes of coal so far that month.
It was just slowing demand that was blamed, part of the reason for the defaults was that Chinese domestic prices had fallen below import costs.
But an executive at an Indonesian coal producer said this was just part and parcel of doing business with China.
They will cancel a cargo on you, then turn around and offer to buy the same cargo, just at a lower price, the executive said, speaking on condition on anonymity.
This is particularly the case for term deals that were struck at levels above the current spot prices.
This makes business sense as well, for no end-user will want to continue paying higher costs when they can secure supplies cheaper on the spot market.
And the overall slower demand has ensured that there are plenty of spot cargoes chasing buyers.
There is also very little legal comeback for suppliers of commodities when a contract is cancelled or deferred.
Taking legal action through the courts is expensive and unlikely to result in a meaningful victory, and is also a good way of ensuring that whatever business relationship you had with your customer is damaged.
Rather, as the executive at the Indonesian miner puts it, commodity suppliers just have to suck it up, because when the market turns up the miners will do everything in their power to ensure they extract the highest prices from their customers.
It's much the same story with iron ore, with a report last week saying Chinese steel mills had defaulted or deferred shipment of up to 4 million tonnes of the steel-making ingredient this month.
Following this news spot iron ore <.IO62-CNI=SI> dropped below $100 a tonne for the first time since 2009, weakening along with Shanghai steel futures, which also reached the lowest since the contract was launched in 2009.
While China's iron ore imports slipped to 57.87 million tonnes in July from June's 58.31 million, they were still up 6.1 percent from the year-earlier month and by 9.1 percent in year-to-date terms.
An even stronger picture emerges for coal, with imports in July totalling 20.22 million tonnes, up 15.3 percent from the same month in 2011 and 51.8 percent in year-to-date terms.
This is despite electricity generation, which is 80 percent coal-fired in China, gaining only 2 percent so far this year and anecdotal reports of elevated stockpiles at power plants.
Spot coal prices at Australia's Newcastle port, the Asian benchmark, have stabilised in recent weeks after slipping to the weakest in two-and-a-half years in June, but at last week's $91.50 a tonne they are not far above the recent low of $84.98 a tonne.
What we have currently is a situation where iron ore and coal prices have fallen largely in expectation of slower demand in coming months, rather than actual lower volumes.
This is entirely reasonable in light of the weakening growth rate for industrial production and the failure of the HSBC flash Purchasing Managers' Index to show any imminent recovery.
It's entirely likely that coal and iron ore imports will weaken in the next few months, in fact it would be a surprise if they continued to hold up in the second half as well as they did in the first.
But equally well, the doom and gloom may be a tad overstated by reports of defaults on cargoes as these shipments may well be ending up at a Chinese port, just at a lower price tag.
Clyde Russell is a Reuters market analyst. The views expressed are his own.--
Posted: Monday, Aug 27, 2012
Launceston: One of the most bearish signals regarding China's commodity demand has been several reports of iron ore and coal cargoes being deferred or cancelled.
The reasoning is sound enough; if the Chinese are defaulting on imports of commodities it must be because demand is down and there is little need for volumes that had been bought when the outlook was stronger.
But there is reason to question just how bearish these defaults are for the overall picture of Chinese commodity demand.
Part of the answer is that this is how Chinese traders and companies conduct business.
They are unafraid to cancel of defer imports if they can buy alternative supplies on the spot market at cheaper prices, or if they feel that a better deal can be renegotiated.
However, let's be clear about the overall level of demand.
While Chinese commodity demand has held up exceptionally well in the first seven months of the year, it does appear to be easing currently in line with slower growth in industrial output.
It's just that the reports of cargoes being deferred and cancelled make the situation sound more alarming than it may actually be in reality.
A Reuters report on July 27 said Chinese coal traders had scrapped import deals for two million tonnes of coal so far that month.
It was just slowing demand that was blamed, part of the reason for the defaults was that Chinese domestic prices had fallen below import costs.
But an executive at an Indonesian coal producer said this was just part and parcel of doing business with China.
They will cancel a cargo on you, then turn around and offer to buy the same cargo, just at a lower price, the executive said, speaking on condition on anonymity.
This is particularly the case for term deals that were struck at levels above the current spot prices.
This makes business sense as well, for no end-user will want to continue paying higher costs when they can secure supplies cheaper on the spot market.
And the overall slower demand has ensured that there are plenty of spot cargoes chasing buyers.
There is also very little legal comeback for suppliers of commodities when a contract is cancelled or deferred.
Taking legal action through the courts is expensive and unlikely to result in a meaningful victory, and is also a good way of ensuring that whatever business relationship you had with your customer is damaged.
Rather, as the executive at the Indonesian miner puts it, commodity suppliers just have to suck it up, because when the market turns up the miners will do everything in their power to ensure they extract the highest prices from their customers.
It's much the same story with iron ore, with a report last week saying Chinese steel mills had defaulted or deferred shipment of up to 4 million tonnes of the steel-making ingredient this month.
Following this news spot iron ore <.IO62-CNI=SI> dropped below $100 a tonne for the first time since 2009, weakening along with Shanghai steel futures, which also reached the lowest since the contract was launched in 2009.
While China's iron ore imports slipped to 57.87 million tonnes in July from June's 58.31 million, they were still up 6.1 percent from the year-earlier month and by 9.1 percent in year-to-date terms.
An even stronger picture emerges for coal, with imports in July totalling 20.22 million tonnes, up 15.3 percent from the same month in 2011 and 51.8 percent in year-to-date terms.
This is despite electricity generation, which is 80 percent coal-fired in China, gaining only 2 percent so far this year and anecdotal reports of elevated stockpiles at power plants.
Spot coal prices at Australia's Newcastle port, the Asian benchmark, have stabilised in recent weeks after slipping to the weakest in two-and-a-half years in June, but at last week's $91.50 a tonne they are not far above the recent low of $84.98 a tonne.
What we have currently is a situation where iron ore and coal prices have fallen largely in expectation of slower demand in coming months, rather than actual lower volumes.
This is entirely reasonable in light of the weakening growth rate for industrial production and the failure of the HSBC flash Purchasing Managers' Index to show any imminent recovery.
It's entirely likely that coal and iron ore imports will weaken in the next few months, in fact it would be a surprise if they continued to hold up in the second half as well as they did in the first.
But equally well, the doom and gloom may be a tad overstated by reports of defaults on cargoes as these shipments may well be ending up at a Chinese port, just at a lower price tag.
Clyde Russell is a Reuters market analyst. The views expressed are his own.--
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