June 16, 2004

Suppliers See Red As China Broadens Ban On Brazil Soybean

The latest decision by China to ban 15 more soybean suppliers from importing Brazilian beans into the country has virtually halted the soybean trade between the two countries, with foreign suppliers accusing the Chinese government of colluding with private crushers who want to wash their hands of expensive imports.
 
China's General Administration of Quality Supervision, Inspection and Quarantine, or AQSIQ, Monday banned 15 suppliers, bringing the total number of suppliers facing the ban to 23.
 
"It's a disaster. I have never seen (any) Chinese quarantine authority (action of) this magnitude before," said a Singapore-based country manager for China at an international trading house that was blacklisted.
 
Monday's list mainly included small shippers. But with most multinational companies blacklisted before that, the latest action virtually halts any import of soybeans from Brazil, traders said.
 
Although all the 23 companies have been banned on quality grounds, as their cargoes "have been found contaminated by red fungicide-tainted seeds" known to be harmful to humans, most traders feel the move is a ploy by the government to limit imports.
 
While China has recently displayed zero-tolerance for fungicide residue in soybean cargoes that are imported, shippers say it is practically impossible for anyone to comply with such strict controls.
 
"This is a baloney. The zero-tolerance rule is unscientific and unreasonable. These soybeans are to be processed into soyoil and the possibility of harmful end products because of fungicide-tainted seeds is very low," said Philip Laney, the Beijing-based country director for the American Soybeans Association.
 
China is the world's largest soybean importer, taking in 20.74 million tons from the U.S., Brazil and Argentina in 2003. Brazil is usually the biggest supplier of beans to China during the current months leading up to October when new crops in the Northern Hemisphere are ready for sale. China imported 6.1 million tons of soybeans from Brazil last year.
 
The exact number of cargoes affected by the ban remains unclear, but traders said around 30 Panamax-size cargoes dispatched from Brazil are en route to China and may have to be redirected to other destinations as a result of the ban.
 
According to Jim Liu, an official at the commercial section of the Brazilian Embassy in Beijing, five ships carrying Brazilian soybeans are now stuck at Chinese ports, unable to unload the cargo. "We will need to find a way for these five cargoes. There are more ships on the way," he said.
 
CHINA INSISTS MOVE AIMED AT PREVENTING TAINTED CARGOES
 
An official at AQSIQ in Beijing said Tuesday that the decision to ban some suppliers was taken purely on sanitary concerns.
 
"We will have to reject as many contaminated cargoes as we can possibly find," the official said.
 
He said it is unclear when the "temporary ban" on the 23 suppliers will be lifted, but added Chinese authorities are "working with the Brazil side on this issue."
 
Jim Liu, with the Brazilian Embassy in Beijing, said the embassy was yet to be informed of the ban by the Chinese authorities although he had seen the statement online.
 
"A delegation from Brazil's Ministry of Agriculture will come to Beijing this week to talk with the Chinese government," he said.
 
Meanwhile, suppliers are accusing the Chinese agency of deliberately using opaque rules to collude with cash-strapped Chinese buyers to reject soybean cargoes booked when prices were much higher.
 
Although Chicago Board of Trade soybeans futures rose overnight, Laney, who represents soybeans growers in the U.S., said the latest dispute makes him worry about "the shippers' willingness to do business with China in the future."
 
Trading houses contacted refused to comment on what they proposed to do with the rejected cargoes with some saying they want to maintain a "low profile" for fear of being targeted in the future.
 
TRADE MAY RESUME IN 2-3 MONTHS, BUT SELLERS TO BE CAUTIOUS
 
Traders expect AQSIQ to lift the ban in about two to three months, once the current domestic stocks are exhausted.
 
"They will have to buy soybeans at some point. In two to three months, they (Chinese soy crushers) will have consumed the current stocks," said a Singapore-based trader at an international trading house that was blacklisted.
 
But business will never be the same again, said the trader.
 
"We will definitely change our practices, such as payment methods. Companies who extended credits to Chinese crushers before will have to think twice now," said the trader, adding his company did not have any payment exposure in China right now.
 
According to a Shanghai-based trader, exporters usually conduct business with China, using the letter-of-credit system as against documentation method, as the buyer or the bank designated by the buyer is expected to make the payment when documentation for delivery of the cargo is completed. Cargoes were priced at a premium to CBOT soybean futures prices.
 
"It's hard to say how the contract will be redesigned, but I think shippers will try to minimize their risks," he said.
 
Meanwhile, no sales are taking place now as even those suppliers not blacklisted fear potential losses, traders said.
 
China has in the process squandered the respect it gained while building the world's largest crushing industry in the past few years, said a Singapore-based trader at a multinational trading house.
 
"China is important to everyone from South American farmers to guys who sit in New York or Geneva headquarters (of the suppliers). Everyone (involved) now has to rethink their strategy based on country risk," he said.
 
When things go sour, "Chinese buyers can't just walk away and say we can't afford it," said American Soybeans Association's Laney.