SHANGHAI, Jun. 13 (SMM) – The ongoing investigation into metal financing at China’s Port of Qingdao is pressuring Chinese iron ore traders to sell goods to meet bank loan repayments due in June, SMM’s ferrous branch Steelease learns.

A report issued on June 3 stated that metal stocks at the port were used multiple times to obtain financing from different banks. Later news that the port was suspending trading of copper, aluminum, and iron ore triggered market panic.

Qingdao Ports International, the main operator of the port facility, described in a statement released on June 6 when it debuted on Hong Kong Stock Exchange that Decheng Mining, a small private company registered in Qingdao, China, had pledged some 100,000 tonnes of alumina and 2,000-3,000 tonnes of copper as collateral to several banks in order to secure loans. The company is mainly engaged in bauxite trades.

The statement also said an investigation was launched into these pledged goods, but that deliveries of other copper, aluminum, and iron ore stocks would be unaffected.

Impact of the probe continues to be felt, although no substantial progress has been reported.

Declining commodity prices and growing stocks have left many enterprises in financial distress this year, and delays in repayments and defaults on loans against L/Cs were reported as a result, Steelease’ Xu Yinqiu says.

Although most banks were leaving the margin for loans against L/Cs unchanged for the moment at 20-30%, some have reportedly raised margin to 30-50%.

Xu believes tighter control over the issuance of L/Cs will be another inevitable result of the probe, and any new restrictions on the issuance of L/Cs will be a big blow to commodity traders, since L/Cs are widely used for short-term financing.

Now that banks are becoming more cautious toward L/C issuance, iron ore traders may experience the worst negative impact. Steelease data show iron ore stocks at Chinese ports are currently about 112 million tonnes, of which 40 million tonnes are used as collateral for loans.

Banks are requesting enterprises to repay existing loans and are now limiting L/C issuance for financing purposes, putting greater financial pressure on iron ore traders. In response, some traders began selling stocks on June 11 to ensure they could repay loans against L/Cs that expire this month. Selling activity is expected to increase next week, which will exert even greater downward pressure on iron ore prices.