Chinesesteelmills and traders are using letters of credit (L/Cs) to buy iron ore as a means of obtaining loans at preferential rates.

The traders appear to have turned to iron ore after the Chinese authorities tightened rules on using L/Cs for copper or steel to obtain hard to come by credit.

Cheaper loans

While steel makers are buying the iron ore for their own use, some traders are obtaining US dollar-denominated loans via L/Cs under credit terms far better than those on offer in China.

After the traders import the iron ore, they sell it in the spot market and invest the cash in other sectors such as real estate.

Payments for L/Cs are only required between three to six months after the importation date.

Crack down possible

A similar scheme, now curbed by the authorities, helped China's copper imports increase to an all-time high of 536,000 tonnes in January.

Some analysts suggest that Beijing could crack down on iron ore transactions in a similar way.

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