China's increasingly stringent credit rules are driving smaller steel mills away from buying iron ore on letter of credit (L/C) terms.

This means that smaller mills are now buying more fixed-price portside iron ore instead of floating-price seaborne iron ore.

L/C problems

China's steel mills have traditionally bought seaborne iron ore on L/C terms to try and take advantage of seaborne prices falling by the time shipments are delivered.

But the credit restrictions now placed on smaller mills by China's banks means they can no longer obtain the L/Cs needed to fund seaborne iron ore purchases.

Cash terms

So smaller mills are now more often buying portside iron ore on cash terms and taking immediate delivery.

As a result, demand for some grades of portside iron ore has increased so it is now selling at a premium of around US$1 per metric tonne above the price of seaborne iron ore.

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