* Stocks in China's main rubber centre top 300,000 T, may be
tied to financing
* China may see slower growth in rubber imports this year
* Risk of price reversal if rubber buying not backed enough
by industrial demand
* Demand from tyre makers dependent on uncertain auto sales
By Lewa Pardomuan and Rujun Shen
SINGAPORE, Feb 27 Chinese investors have been
piling up rubber as collateral for financing, recently driving
prices to 10-month highs, in what could be a risky bet as
warehouses in the world's top user fill up with a commodity that
can only be stored for a limited time.
Copper, zinc and steel have been used as financing tools in
China in the past few years, but the move into rubber to back
loans has raised concerns about the potential impact on the
rubber market from such large inventory overhang.
The financing deals, which have pushed rubber stocks in
China to at least 3-year highs, are based on the expectation
that China's economy will grow faster this year and traders who
are in such deals would benefit from a rise in prices of rubber
or other assets they invest in using the loans.
As much as half of the nearly 328,000 tonnes of rubber
sitting in warehouses in Qingdao, a rubber trading hub in
eastern China, was tied up in such deals, dealers estimated.
But investors in the rubber play face potential risks from a
slower pace of economic growth and rubber consumption.
If automobile sales grow more slowly than forecast, demand
from tyre makers, rubber's biggest users, could also slow, which
would hurt prices and force those in the financing deals to sell
their stocks to avoid further losses.
"This is going to be a growing risk to the rubber market in
the second and third quarters, which threatens to cut prices and
undermine the value of banks' collateral," said Gu Jiong, a
rubber analyst at Yutaka Shoji Co in Tokyo.
China produced and imported 340,000 tonnes more than it
consumed in 2012, according to data from the Association of
Natural Rubber Producing Countries (ANRPC), an industry body
which publishes rubber data.
Imports rose 18 percent to about 3.4 million tonnes last
year, according to ANRPC data, helping to lift benchmark Tokyo
rubber futures by more than 60 percent from a 3-year
trough in August to their highest since March last year on Feb.
6 at around 337 yen a kg ($3.59). Prices have since pulled back
about 14 percent on worries about the U.S. and euro zone
economies and a volatile yen.
The stocks at Qingdao, with a total value of close to $1
billion, are the highest since at least early 2010 and compare
with a low of 145,000 tonnes last April, dealers said. There are
also about 102,000 tonnes of rubber in warehouses monitored by
the Shanghai Futures Exchange SNR-TOTAL-DW, which are for
delivery on futures contracts and are not related to financing
In a typical financing deal, an importer uses a letter of
credit to buy a commodity and pledges it as collateral for a
bank loan that has to be repaid over 3-9 months.
But rubber can only be stored for about six months before it
needs to be re-tested for quality, especially for usage in
making tyres. Longer storage raises the risk for holders that
the value of the material will have fallen as it deteriorates.
Banks mitigate the risk by loaning the equivalent of only
about half the collateral's value. That compares with
non-perishable collateral such as metal, where banks loan more
than 80 percent of the value. For perishable commodities such as
rubber and foodstuffs, banks also appoint collateral managers to
oversee the stocks and monitor the market.
The total exposure of banks to the rubber stocks in Qingdao
amounts to around $260 million, according to Reuters'
calculations. That assumes half the rubber stored has been used
for financing and that banks loan about half the value of the
product. That would be just a fraction of banks' total loans in
China of 67.3 trillion yuan ($10.78 trillion) as of end-2012.
Chinese and international banks, including Industrial and
Commercial Bank of China, Standard Chartered
and Australia and New Zealand Banking Corp, are active
in commodities financing, according to the lenders' websites. It
was not clear if these banks also financed rubber purchases.
The risk of any unwinding of the lending scheme causing a
string of defaults on Chinese rubber purchases from top
producers such as Thailand or Indonesia should be limited as
sellers tend to deal with regular buyers and some ask for down
AUTO SALES MAY BE KEY
China's auto sales rose 4.3 percent last year to 19.3
million vehicles, half what was expected by the China
Association of Automobile Manufacturers (CAAM) at the start of
the year, as the economy grew at its slowest since 1999 and
political tensions between Beijing and Japan hit demand for
Japanese cars. Sales had grown more than 30
percent in 2009 and 2010.
The CAAM expects sales to climb 7 percent in 2013, although
moves by local governments in China to restrict car sales to
help ease traffic gridlock could trim growth.
Tyre makers may need time to grind down their own inventory
before making fresh purchases if vehicle sales slow. Tyre makers
do not disclose inventory levels and these could not be
China's economy started the year on a brighter note, with
January exports and imports and new lending surging, but the
numbers may have been distorted by the Lunar New Year holiday in
early February, economists said.
The China Rubber Industry Association has forecast rubber
consumption growth of 5 percent for 2013, slower than the 7
percent forecast for last year. Final figures for 2012 are not
"Rubber consumption (in China) will still grow this year,
but prices are under pressure because growth in production is
going to be higher than growth in consumption," said Chen Ruibi,
analyst at Shanghai CIFCO Futures.
$1 = 6.2427 Chinese yuan)
(Additional reporting by Kelvin Soh and Prakash Chakravarti in
Hong Kong, and Fayen Wong in Shanghai; Editing by Muralikumar
Anantharaman and Ed Davies)