Hopes of a recovery in the iron ore price could be dashed by reports that a financing scandal has put the brakes on imports of iron ore and copper at key Chinese ports.
Just days after iron ore minnow Termite Resources shuttered its Cairn Hill iron ore mine in South Australia, reports in the Wall Street Journal suggest that banks are examining allegations that a Chinese trading company pledged metal as collateral to more than one lender.
Chinese traders have long used commodities such as iron ore and copper as collateral to borrow from overseas, thus avoiding both China's capital controls and its higher interest rates.
It is estimated that as much as 40 per cent of the iron ore sitting at Chinese ports is being used as collateral, and Goldman Sachs estimates $US100 billion ($106.5 billion) has been borrowed in this way since 2010.
While Chinese banks have been clamping down on the practice of borrowing using commodities for some months – this is one reason the iron ore spot price has fallen more than 30 per cent since the start of the year – the fraud allegations present a new issue.
According to the commodities traders cited by The Wall Street Journal, the financing scandal appears to have put the brakes on copper and iron ore moving through ports, with customs officials now taking 15 to 20 days to clear shipments, up from seven to 10 days previously.
Still, the fraud allegations and the ensuing slowdown at the port of Qingdao, are only part of the reason for the fall in the iron ore price.
Major producers, led by BHP Billiton, Rio Tinto and Brazil's Vale, are ignoring the falling iron ore price and the slowing Chinese economy and ramping up production in a bid to wipe out higher-cost, lower-quality producers in China and around the world.
The result is growing inventory of iron ore in China and growing discounts on offer to traders.
Last week The Australian Financial Review revealed that Rio Tinto and Fortescue Metals Group have both increased the discounts they offer on lower grade iron ore.
Estimates from China suggest that while Chinese steel production has risen by 2 per cent to 5 per cent, iron ore imports are up 20 per cent this year.
The resultant oversupply is putting particular pressure on lower-quality product.
After sinking below the $US90-a-tonne level last week, iron ore spot prices ticked up on Friday and are tipped to rise further in the early part of the week.
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