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Home > News > Raw Materials > Steel stockiest default in Shanghai crosses CNY 5 billion

Steel stockiest default in Shanghai crosses CNY 5 billion

By Unknown , 2012-09-17 12:00:00

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Reuters reported that Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery that the metal was never in the warehouses in the first place.

As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders.

A trader from a steel firm in Shanghai said “What we have seen so far is just the tip of the iceberg. The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry.”

Banks, too, are giving less credit against warehouse receipts. A banker told Reuters “Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans.”

Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.

Industry sources estimated cases that have already come to light account for about CNY 5 billion of bad debt in Shanghai, one of China's biggest steel trading centres.

Source: Reuters

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