Massive soybean defaults loom as China buyers play hard-ball
RIZHAO, China -- Chinese buyers might default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the U.S. and South America, to avoid incurring huge losses in a depressed local market,...
RIZHAO, China -- Chinese buyers might default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the U.S. and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer says.
The hard-line approach taken by Chinese buyers raises the possibility that more cargoes could be dumped into the market, after buyers walked away from at least 500,000 metric tons of shipments in recent weeks.
Trading firms mostly clustered in China's Shandong province have refused to make payments for about 20 shipments, Shao Guorui, general manager of Shandong Sunrise Group, said in an interview.
Sunrise accounts for about 12 percent of China's soybean imports and is part of Shandong Chenxi Group Co., a firm run by Shao Zhongyi, China's 357th richest man according to Forbes' 2012 rich list, and Shao Guorui's brother. The family made its money in the petrochemical business.
"Most of the cargoes were delivered by the seller before receiving letters-of-credit and buyers are unwilling to pay now because they will suffer massive losses," Shao says.
"If buyers cannot resolve the issue, they may also cancel future shipments."
Shao declined to say if his company had also defaulted or had any plans to. In 2013, Sunrise cancelled shipments from Japan's Marubeni Corp. because of Brazil port congestion.
Some Chinese commodity buyers have previously threatened to default, or cancel cargoes, to force sellers to take lower prices.
Shao estimates that the companies behind the 20 shipments had booked between 80 and 100 cargoes for delivery between April and July, most of which were sold by Marubeni.
Benchmark futures for the oilseed in Chicago have gained 14 percent this year. Honoring these deals would cause Chinese buyers to incur a loss of as much as $7 million per shipment, Shao says.
Marubeni is the biggest soybean exporter to China, shipping about 16 million metric tons a year along with Gavilon, which it bought last year, or about a quarter of the country's annual imports of 60 million metric tons.
A Marubeni spokesman declined to comment, citing confidentiality agreements with customers and suppliers.
Risk of bankruptcy
Trading firms in China are battling with weak demand for soymeal. Crushers, confronted by negative margins, are also unwilling to accept cargoes at current prices.
"If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts," Shao says.
In a sign of the pressure the sector is under, China's Dongling Grain & Oil says it expected to post a loss of 202.8 million yuan ($32.60 million)in the first quarter, versus a net profit of 8.2 million yuan previous year.
Shao says his estimate on the 20 shipments at risk of default was based on discussions with other crushers and trading firms in Shandong province, who held a meeting last week.
"Marubeni is deluded in thinking that payments will come once the cargoes have sailed," says an industry executive also based in Shandong, who declined to be identified
With so many shipments at risk of a default, Chinese buyers now have an upper hand in bargaining for lower prices.
"Most of the cargoes will eventually be sold to China. This will force sellers to renegotiate prices, which will benefit buyers," says Gao Yanbin, an investment manager with agriculture trading firm Shanghai Shenkai Investment Co. Ltd.
Chinese demand for soymeal, used in poultry feed and the main product made from soybeans, has been hit by bird flu outbreaks, cutting demand by as much as 30 percent in the first quarter compared with normal months, analysts say.
Shao estimates demand for soymeal could fall 15 percent from year ago as farms had been reluctant to restock poultry after heavy losses last year.
"We don't expect demand nor prices to improve in the next one or two months," he says, adding China's monthly imports between April to July would be more than 5 million metric tons.
Tight credit, worsening cash flow
China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.
Traders estimate more than 10 million metric tons of soybeans, out of China's imports of 63.4 million metric tons last year, are imported for financing annually.
Sunrise, which has 5,700 employees and 27 billion yuan ($4.34 billion) in assets according to its website, launched a financial services firm in 2009, which offers small scale loans.
Banks, once content to rake in profits from the lending, have been spooked by growing losses at crushers and trading firms and have begun tightening credit.
"They are asking for more a higher deposit to opening a LC (letter of credit) nowadays; before it was set at 10 percent of the contract value but banks have gradually raised the level to between 20 to 30 percent," says an executive at a trading firm.
Industry sources say the hike has severely crimped traders' cash flow, with weak demand leaving them with high inventory they cannot liquidate fast enough.