Hong Kong banks wary of front-to-back LCs in iron ore market

Banks in Hong Kong have started restricting certain types of letters of credit granted to iron ore traders, amid concerns about credit risks in the import trade into China.

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The Hong Kong units of at least two major banks have stopped issuing front-to-back letters of credit (LCs) for iron ore imports, several sources told Steel First.

This comes after a decline in prices this year as well as measures by Chinese regulators to tighten credit granted to domestic iron ore traders.

"The move of the banks in Hong Kong is out of the concern for credit tightening inside China, and this could spread to overseas banks in other countries or regions," one trader said.

Front-to-back LCs – or the issuance of an LC to the supplier before a corresponding LC from the customer has been issued – are used for about 30% of iron ore imports into China, one source claimed. This figure was not verifiable.

China’s banking regulator is understood to have ordered mainland banks to step up scrutiny of iron ore-related LCs. Deposits required from companies have also been increased.

This is part of a wider crackdown on forms of financing using imported commodities as collateral.

"A share of 30% of total imports is not a small amount. [This] could batter iron ore demand and prices," the trader said.

The Metal Bulletin 62% Fe Iron Ore Index stood at $106.29 per tonne on Tuesday May 6, down from $134.89 per tonne at the start of this year.

"As the iron ore market has gone downbeat, banks become more cautious themselves now. But how much the impact could be subject to how long banks will practice this policy," an iron ore trader at a Chinese state-owned firm said.

At the moment, the issuance of front-to-back LCs by banks in Singapore is not yet affected, sources suggested. And business conducted using back-to-back LCs, secured by both the supplier and consumer, is also not yet affected, they added.

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