Chinese buyers are deferring 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, traders say, 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 come on the heels of a slump in global thermal coal benchmark prices to two-year lows and increases the prospect of an even steeper fall unless China revives buying to absorb the global coal surplus as exporters ramp up production.
“We need China to buy heavily, a severely hot summer across Europe followed by a long, cold winter, and some production cuts for the market to rebalance,” a European coal trader said.
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 $10 a metric tonne (1.1 tonne) since then. Say if the Chinese traders were buying a cape-sized shipment, they’d be suffering a loss of nearly $1.5 million alone,” 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 dishonor the contract to survive,” he added.
China’s premier called for additional efforts to support growth on Sunday, signaling Beijing’s willingness to take action to bolster its economy.
Some analysts said they were bearish regarding China’s prospects of steeply ramping up coal imports any time soon.
“China doesn’t look likely to provide an upside demand surprise which could clean up the market in the near-term,” said Marcus Garvey, analyst with Credit Suisse, citing high power plant stocks and a slowdown in power generation in April.
China’s premier called for additional efforts to support growth on Sunday, signaling Beijing’s willingness to take action to bolster its sagging economy.
Traders said they expected demand to pick up next month, coinciding with peak summer consumption of coal in China.
Indonesian Coal Mining Association executive director Supriatna Suhala said coal exporters were facing tougher competition, but he expected any slowdown in China to be “only temporary”.
Concerns over defaults were also spilling over to the iron ore markets, where prices have dropped around 10 percent since late April to hover at $134 a tonne.
“We ourselves have had one of our buyers default on us after just a few hours. We sold the cargo to an end-user in China and a few hours later the buyer came back, saying ‘the market’s falling too fast we want a lower price’,” said a Singapore-based iron ore trader.
In October last year, Chinese mills also sought delivery delays when iron ore prices slid nearly 31 percent as weak steel demand forced producers to curb output.
For copper, traders said Chinese merchants have been delaying term deliveries since March, while sluggish demand also prompted buyers to re-export some cargoes.
A Reuters poll expects China’s economic expansion in the second quarter to slip to 7.9 percent, which would mark the sixth consecutive quarter of weakening growth.
Reflecting greater caution, BHP Billiton (BHP.AX), the world’s biggest miner, has put the brakes on an $80 billion plan to grow the company’s iron ore, copper and energy operations.
Slumping commodity prices and escalating costs have squeezed cash flows, pushing BHP to join rival Rio Tinto (RIO.AX) reconsidering the pace of their long-term expansion in countries such as Australia and Canada.