Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices.
“We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment.”
A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.
China’s economy grew 8.1 per cent in the first quarter from the same period of 2011, the weakest rise in nearly three years but still pointing to a so-called soft landing.
Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.
Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said.
Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”. In response to recent dismal data, the Chinese central bank has cut the portion of deposits that banks must hold as reserves to encourage the flow of credit.
As the world’s main engine of commodities consumption, the Chinese business cycle is key for raw materials markets. The country is particularly important for bulk commodities such as iron ore, used in steelmaking, and thermal coal, used to fire power plants.
It is the world’s largest importer of iron ore, accounting for roughly 60 per cent of the seaborne market, while it ranks as the second top importer of coal, behind Japan and with a market share of 20 per cent of global trade.
Because of slowing economic growth and the high domestic stockpiles of many raw materials, China’s commodities imports in April, the latest month for which data are available, were unexpectedly weak, with iron ore imports hitting a six-month low and copper imports at an eight-month low.
Iron ore and thermal coal are critical to the profitability of blue-chip miners such as BHP Billiton, Vale of Brazil, Rio Tinto, Xstrata and Anglo American. The miners, under pressure from investors, have announced they will reduce investment in the next few years due to cooling commodities markets.
The price of the benchmark iron ore with 62 per cent iron content in Singapore fell on Friday to $135.25 a tonne, down nearly 9 per cent from the end April.
Colin Hamilton, commodities analysts at Macquarie, said sentiment in the iron ore market was “pretty weak”.
“People are worried about China and China is worried about Europe,” he said. “Everyone is worried about growth. You cannot decouple Europe from China.”
Thermal coal prices in the Australian port of Newcastle, the benchmark for Asia, fell on Friday to $97.5 a tonne after breaking below the $100 level earlier this month for the first time in 18 months.
The slump in thermal coal prices is also due to higher exports by US miners, which face lower domestic demand because of the lowest natural gas prices in a decade.