Winter of discontent for China coal trade as credit cut

Wed Sep 26, 2012 2:29am IST

Stocks

   

* Chinese banks reduce loans to coal traders

* Banks seek shorter payment terms, deposit for letters of credit

* Tighter credit likely to hamper coal's recovery

* Add to concerns about strains on banking system

By Fayen Wong

SHANGHAI, Sept 26 (Reuters) - Chinese banks are cutting lending to coal traders and tightening credit terms due to worries about defaults, in a move likely to add more pressure on imports just as demand in the world's top coal consumer has a chance of rebounding ahead of winter.

Problems financing coal deals will make it harder to secure shipments from top producers, such as Australia and Indonesia, and limit any rebound in global prices, which have lost a fifth since the start of the year to under $90 a tonne.

The market has been hoping for a rebound in Chinese imports and prices in the fourth quarter, when winter consumption typically prompts utilities and trading firms to stock up.

"The banks are really breathing down the necks of some of these coal trading firms," said a European seller who does business with Chinese trading firms.

"Some of them have closed their coal trading business because banks are no longer giving them any letters of credit and are recalling their loans," added the trader, who declined to be named because he was not authorised to speak to the media.

From listed players to smaller coal traders, the tough business conditions are playing out in weaker earnings or losses, and making credit more difficult to obtain.

Trade sources said importers in Guangdong province, where a large proportion of shipments arrive, had already scaled back on imports in part because banks had reduced lending to the firms.

Chaozhou City's Yatai Energy Co Ltd, which imported around 10 million tonnes of coal last year, temporarily halted its coal import business in July, local media reported.

Good Credit International Trade Co Ltd, a unit of the Fengli Group, had also cut coal imports, said a trade source with direct knowledge said.

Yatai declined to comment and Fengli Group and Good Credit could not be reached by telephone for comment.

Many Chinese thermal coal importers have been losing money on imports since late last year when domestic supplies became cheaper, making imports harder to sell, industry sources say.

However, easy credit allowed them to roll over debt and step up imports in early April as they bet on a summer price rally, prompting imports to surge 44 percent from a year ago to 150 million tonnes in the first eight months of 2012.

But the bet went badly wrong as Chinese economic growth slowed to its weakest pace in three years, causing coal stocks to pile up at ports and power stations, resulting in a 20 percent drop in domestic prices from 787 yuan ($120) a tonne in late-April to a near three-year low of 626 yuan in early August. Prices have since ticked up slightly to 630 yuan.

The price drop led to defaults and deferral of shipments, which saw imports falling for two straight months since hitting a record high of 22.5 million tonnes in June. Shipments in July and August were down 10 percent and 14 percent, respectively, from the preceding months.

"Coal prices may stay weak for a long time and many trading firms are already losing a lot of money," said a Shanghai-based loans officer at China Construction Bank. "It is natural for us to be more selective in who we lend to and draw up more careful terms to protect ourselves."

Unlike the steel and the property sectors, where Beijing had ordered banks to cut lending due to rising defaults, the move to cut loans to coal firms has been voluntary and sparked by growing concern about increased bad debt.

LOSSES AT COAL TRADERS

"Many trading firms made the wrong bet. At the April coal conference, several big trading firms signed deals of between 1-2 million tonnes because they thought overseas prices had hit a bottom," said David Fang of industry portal CoalWorld.net.

"But prices suddenly fell by as much as $15 a tonne within two months. So the big players would easily suffer $15 million on book losses for orders signed in April."

Zhuhai Qinfa Trading Co. Ltd, a coal trading unit of Hong Kong-listed Qinfa Group, reported a net loss of 100.04 million yuan ($15.79 million) in the six months ended June 30, against a profit of 18.7 million yuan in the same period last year.

There is no official data on how much Chinese banks have lent to coal trading companies. But the value of coal purchases is considerable -- $15 billion based on coal imports of 133 million tonnes in the first seven months of the year and an average import price of $111 per tonne.

Overall soured loans at China's 3,800 banks increased for a third straight quarter as of June 30, the longest streak of deterioration in eight years, according to the China Banking Regulatory Commission.

Overdue loans are also climbing. Industrial and Commercial Bank of China said loans overdue by more than three months rose 7 percent from the end of last year, while China Construction Bank saw the 90-day figure jump 34 percent.

TOUGHER RULES

Up until last year, banks were throwing money at coal mines and traders, offering low interest rates on credit lines of tens of millions of yuan that required no upfront deposit.

"Getting a LC (Letter of Credit) now is tough and we have to clear some of our debt before we get a loan of a much smaller amount," said a Beijing-based trader, adding that the time given to repay had also been cut to one to three months, compared to a six-month repayment term previously.

A letter of credit is issued by one bank to another to serve as a guarantee for payments made to a specified company.

Some banks also require companies to put up a higher cash deposit, sometimes as much as 50 percent, to get them.

They are also demanding to be the title bearer of the cargo, so that they can at least liquidate the stock and partially recover the debt if the trading firm defaults on the loan.

Such clauses mean the trader can only sell the cargoes within China, which restrains them from moving shipments to other countries such as Japan or South Korea, even if coal was fetching a higher price there.

"Everyone is hoping for a bounce in imports ahead of winter. But the tougher terms for trade financing as banks reduce their risk exposure could cause another big disappointment," said a Singapore-based trader, w ho declined to be identified because he was not allowed to speak to the media. ($1 = 6.3264 Chinese yuan) (Editing by Simon Webb and Ed Davies)

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