The Hindu Business Line : Iron ore exporters to China hit by payment defaults

Besides, Chinese banks are also refusing to honour the letters of credit issued on behalf of the importers. The Vice- Chairman of the Federation of Indian Mineral Industries (Southern Region), Mr Basant Poddar, said, “Chinese Banks are refusing to honour the letters of credit over some pretext or other.”

There are at least 25 outstanding LCs with the exporters, Mr Poddar said. A letter of credit (LC) is a communication from the buyers/importers bank that the payments would be honoured and in the event of shortfalls, the bank would cover the payment obligations.

However, Mr Poddar said, Chinese banks had so far refused to meet the LC obligations leaving Indian exporters in a precarious liquidity situation. Each LC is valued at about $3 million. All trade between India and China is invoiced in US dollars. At least 15 LCs have been dishonoured by the banks, translating into $45 million.

Interest-free bonds

He said some of the Chinese importers had offered interest-free bonds to the exporters. Only some of the large Australian exporters had accepted the bonds from the Chinese, especially since they are long-term contracts.

“We have not accepted the bonds,” Mr Poddar said. Instead, FIMI had attempted to encash the bank guarantees provided by the importers.

Discounting bills

Some of the exporters had also attempted to discount the bills with domestic banks, to meet their liquidity requirements. However, domestic banks have declined to discount bills from Chinese importers in view of the tight provisioning regulations.

Bankers said they were unwilling to discount any of the Chinese outstandings. This was in view of past difficulties faced in meeting payments from their respective counter parties. The banking sources said they were unwilling to discount the bills on a with-recourse basis, in view of the payment risks involved. Besides, there were fears that such LCs could dent bank balance sheets.

One of the major issues involved were the extreme volatility in iron ore price. The Chinese importers had lifted Indian iron ore at prices as high as $120 a tonne. Currently these prices are ruling at around $40 a tonne.

Unlike Australian and Brazilian suppliers, Indian suppliers had preferred to export on the basis of spot prices to take advantage of the high prices. However, post Olympics, iron ore prices crashed to the current levels of less than $40 a tonne. This price is lower than the long-term Australian and Brazilian contract prices estimated at about $90 a tonne.

Related Stories:
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Iron ore duty cut: Chinese demand more critical
Iron ore exports down to a trickle
Iron ore exports likely to drop next year
‘China impact on iron ore sector could stabilise industry’
Iron ore offtake may drop 10-15% due to China’s import curbs

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