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Chinese importers have defaulted on at least 500,000 tons of U.S. and Brazilian soybean cargoes worth around $300 million, the biggest in a decade, as buyers struggle to get credit amid losses in processing beans.
Three companies in the eastern province of Shandong had defaulted on payments for shipments as they were unable to open letters of credit with banks, trade sources said on Thursday.
A string of defaults on loans, bonds and shadow banking products in recent weeks has highlighted rising credit risks in China, partly fueled by signs the economy is slowing.
Commodity firms, along with semiconductor and software companies, are among the most at risk of credit defaults, a Reuters analysis of more than 2,600 Chinese companies showed.
Up against the cooling economy and signs that authorities will not step in every time a loan goes bad, Chinese banks are becoming more hard-nosed and selective about whom they lend to.
"There are five to six (panamax) cargoes which are unable to be unloaded at ports because buyers cannot open LCs (letters of credit) and there are no LCs for an additional 5-6 cargoes floating on the sea," one Beijing-based source said. Each panamax cargo is for 50,000 to 60,000 tonnes.
Defaults by buyers in China, which imports 60 percent of the soybeans traded in the world, would likely cap a rally in global prices as they coincide with bumper supplies from Brazil and Argentina hitting the market.
Chicago Board of Trade front-month soybeans edged lower on Thursday after climbing to their highest since July in the last session when the U.S. Department of Agriculture cut its forecast for stocks remaining at the end of the crop year.
"The reality is that the world is reliant on Chinese imports of soybeans to maintain this price strength," said Luke Mathews, commodities strategist at Commonwealth Bank of Australia in Sydney.
"It is putting a question mark on the sustainability of these prices."
The default on 500,000 tonnes of soybeans is the biggest since 2004, when buyers walked away from an estimated 30 contracts, resulting in a loss of close to $700 million, traders said.
Industry sources said some of the companies defaulting have been using soybean imports to secure cheap financing, with interest rates on letters of credit as low as 2 percent and allowing delayed payment of several months.
Having imported large amounts, some of them even sell the oilseed at a loss, as a way to liquidate their stocks and plough cash into more profitable businesses.
Fearing a wave of defaults as China's economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement.
Exporters, in a bid to gain a foothold in the lucrative Chinese market, sometimes ship cargoes when importers do not have confirmed letters of credit, trusting buyers will honor their commitment. The practice was briefly abandoned after the wave of defaults in 2004 but slowly resumed.
With negative processing margins and tightening credit, sources said there could be more defaults on cargoes of soybeans, crushed to make cooking oil and animal feed ingredient soymeal.
"More ships are coming in, but given the big losses banks are not risking opening LCs for those trading firms," said a senior company executive whose firm has faced rejections in getting letters of credit from banks. "It is really an earthquake for the industry."
Crushers are losing 500-600 yuan ($81-$97) for processing a tonne of soybeans, compared with a 600 yuan profit in the fourth quarter of last year during peak consumption and when some shipments were delayed.
The fat margin in the fourth quarter prompted China to purchase 27.7 million tonnes of U.S. soy so far in the current marketing year to August, 2014. China bought a total of 21 million tonnes of U.S. soybeans the year before.
China imported 15.35 million tonnes of the oilseed in the first quarter, up 33.5 percent on a year earlier, according to official Customs data issued on Thursday.
"Crushers are making big losses while downstream product meal is not selling very well," said an official at a body, which oversees soybean imports under the commerce ministry.
Imports could fall below 15 million tonnes in the third quarter from 18.25 million in the same period last year, traders and industry officials said.
"If you crush beans in China today you lose $80-$100 a tonne," said a Singapore-based senior executive with a global trading company that has processing facilities in China.
"This is really discouraging people from buying beans and we expect the real impact will be felt in the third quarter."
Demand for soymeal has been hit by outbreaks of bird flu, cutting appetite by as much as 20 to 30 percent in the February-March period, analysts said. Pig farmers have also reduced purchases as they trim herds due to oversupplied pork markets.