May 9, 2011

 

China's soy imports said to be used for financing deals

Soy is emerging as a financing tool for commodity trading companies, which are using imports of the oilseed to finance unrelated cash loans rather than to feed downstream food demand, traders and analysts said.

 

The trend may explain why hefty soy shipments continue to be scheduled this year and threaten to swamp prices, despite flagging demand from soy crushers, record port inventories and state-imposed price caps on downstream soy products.

 

"Some trading companies are buying soy for financial purposes," said an executive with a state grain trading house.

 

The trading companies need cash for other projects, often unrelated to commodities, traders and analysts said. As national credit policies tighten, they have moved to obtain more credit by having banks issue letters of credit against soy imports.

 

"When the shipments come in, they sell the soy at whatever price, then they use the money to pay off the loan, which only comes due in three or six months," the executive said, comparing it a shorter period of around a month to get soy deliveries.

 

"They don't care what the (soy) price is, because they need the cash immediately," he said.

 

The letters of credit are often provided interest-free to the trading companies, as the banks that provide them usually have a larger loan relationship with these companies on other projects, analysts said. The companies get about six months to pay up these LCs, while they are able to encash what they import against the LCs or pledge it for fresh borrowing in about a month, allowing them to utilise the funds for the rest of the period for other purposes.

 

Analysts estimated about 30%-40% of current port stocks - which reached record levels of 6.65 million tonnes last week, compared to 4.96 million tonnes a year earlier - were being used for financing deals.

 

These trading companies are often willing to take shorter-term losses in soy resales in exchange for gains in their longer-term development projects. The soy they import is resold immediately or as soon as the trading companies are able to find buyers, analysts said.

 

Trading houses involved in such deals often also deal in real estate development, experts said.

 

"It's part of their cost of doing business... That's why Shandong port prices are always RMB20-30 (US$3.08-4.62) lower than spot levels," the executive from the state trading company said.

 

Landed prices for soy deliveries to China from Brazil are currently around RMB4,270 (US$657)/tonne, about RMB20-30 higher than domestic prices.

 

Some analysts are concerned that the large build-up in import volumes would swamp soy prices, which have already fallen about 2% in the domestic futures market.

 

As inflation took root, the government ordered soy processors not to raise cooking oil prices and half of the country's soy-crushing capacity has been suspended due to negative crushing margins.

 

However, China's soy imports in the first three months this year has only declined 0.7% on-year, and Ministry of Commerce estimates show import volumes were likely to gain on-month and on-year in April and May.