The cause is the break down of the world commodity trading system. For the past few weeks Andy and I have been reporting in our respective dailies on the difficulties being faced by importers and exporters of basic materials in getting access to bank finance to fund trades. For example, Andy wrote about South Korea’s request for immediate aid support from the US to fund food and fuel imports, I discussed how the lack of trade finance was reducing the volume of coal shipments into Rotterdam and was affecting the volume of US grain exports. When you come to think about it, if banks are reluctant to lend to each other because of perceived counter-party risk, why are they going to lend to a small trader from Asia, Africa or even Europe. We know of banks that have rejected letters of credit from other banks – and we are aware of banks that have simply refused to pay out on letters of credit because they claimed they did not have access to the funds. Without a working trade finance system the global market is going to break down……….eventually.
And that’s where we are at the moment. The reason that spot iron ore prices in India have collapsed – more than halving in three months, is because Chinese demand has vanished but it has vanished because of a combination of real demand destruction and apparent demand destruction caused by the inability to finance cargoes. Its the same for other bulk commodities, industrial metals, coal, oil and even food. The slump in global demand for basic materials is real but it is not as bad as the BDIY would make you believe.