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APRIL 30, 2014 - 3:00 AM ARTICLE 19 OF 27
Chinese iron ore prices slump 7% in two weeks
MAX MASON

China's efforts to crack down on its shadow banking sector have pushed the iron ore price to a seven-week low, but seasonal demand is expected to hold the price steady until the second half of 2014.

Earlier this week, the iron ore price, measured at China's Tianjin Port, dropped 2.2 per cent, adding to last week's 4.7 per cent slump.

Iron ore is now trading at $US108.60 ($117) a tonne, its lowest in seven weeks.

The raw metal has been heavily involved in financing deals in China, which has caused significant volatility in 2014, as the Chinese government attempts to curb the country's shadow banking sector.

The China Banking Regulatory Commission has argued for an investigation of iron ore financing deals. It is reported that banks are due to hand in detailed reports on April 30, leading to increased volatility over the last week.

It is believed tighter financing regulation will cause borrowing costs for iron ore buyers to jump.

''Reports were that the regulator, the CRBC, has requested banks to investigate iron ore financing deals to reduce 'fake' trades and improve risk management,'' ANZ head of commodities Mark Pervan said. ''The order follows measures already introduced by Chinese banks to better secure trade finance deals, requesting mills provide higher deposits to issue letters of credit.''

Should the regulator be successful in imposing higher and stricter borrowing costs, iron ore buyers may react by selling the metal at a heavily reduced price to obtain cash, leading to further falls.

Fears of tightening credit have led to a big rise in iron ore stockpiles.

Inventories at ports in China, the world's largest buyer of iron ore, are at record levels, after rising 1.4 per cent to 109.55 million tonnes last week, according to Shanghai Steelhome Information Technology.

But inventory at steel mills has fallen over the past two weeks, from 29 days' supply to 26 days, which is not high for the usually construction-heavy second quarter, CLSA head of resources Andrew Driscoll said. ''Steel production in March was a record level and, typically, steel production rises sequentially in March, April and May, so that seasonality seems to be on track and it's leading to a drawdown in steel inventory,'' he said.

Steel prices are falling, Mr Driscoll said, with traders negative about the outlook for China's property market and tightening liquidity.

''We wouldn't expect prices to fall much more in the current quarter against that backdrop of rising steel production, sequentially in April and May. Our concern for the market is more the second half of the year, where we do expect iron ore prices to fall below $US100 a tonne.''

In early March, the unwinding of finance deals where iron ore was used as collateral saw the metal plunge more than 10 per cent in two days.