Chinese banks have limited letters of credit (L/Cs) for iron ore imports according to a trader in China's eastern Shandong province.

The new but anticipated limitations appear to be a significant factor forcing iron ore stocks up and prices down.

Record high

Imported iron ore stocks at major Chinese ports are at a record high of 110.55 million tonnes according data from Steelhome, which tracks prices relevant to China's steel market.

This has pushed Shanghai steel rebar futures to US$500 a tonne, the lowest price in the last twenty years.

Probe anticipated

In February, it emerged that Chinese steel mills and traders were using L/Cs to buy iron ore as a means of obtaining loans at preferential rates and that, because of this, the authorities may force a documentary credit shortage, (DC World News, 24 February 2014).

Beijing has now reportedly launched a probe into this apparent shadow banking practice.

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