Soaring demand and high prices for metals are diminishing profit margins for Chinese metal-using firms, prompting banks to fear that cash strapped metal buyers may add to the heavy bad debt burden already borne by Chinese banks.

As a result some banks are limiting the amount of letters of credit (L/Cs) they are prepared to issue for metal buying firms.

Cash only

The cash crunch is affecting firms buying copper, zinc and aluminium. Some sellers, such as China's biggest copper producer and importer Jiangxi Copper Co. Ltd are selling only on a cash in advance basis.

China's burgeoning construction and manufacturing industries have stoked demand for metals. This year the price of copper has risen more than 80 per cent, zinc by 70 per cent and aluminium by 25 per cent.

L/C limits

Metal traders report difficulties extracting payment from customers. One copper trader said a client that bought 200 tonnes of copper paid using five L/Cs in one week, each one limited because clients have fixed credits for each L/C.

It is not only banks that are limiting credit. One aluminium manufacturer says it has halved the amount of credit it extends to customers.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.