Chinese buyers may default on a further 1.2 million tonnes of soybeans worth about $900 million being shipped from the United States and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer said.
The hard-line approach taken by Chinese buyers raises the possibility that more cargoes could be dumped into the market, after buyers walked away from at least 500,000 tonnes of shipments in recent weeks.
Trading firms mostly clustered in China's Shandong province have refused to make payments for about 20 shipments, Shao Guorui, general manager of Shandong Sunrise Group, said in an interview.
Sunrise accounts for about 12 percent of China's soybean imports and is part of Shandong Chenxi Group Co., a firm run by Shao Zhongyi, China's 357th richest man according to Forbes' 2012 rich list, and Shao Guorui's brother. The family made its money in the petrochemical business.
"Most of the cargoes were delivered by the seller before receiving letters-of-credit and buyers are unwilling to pay now because they will suffer massive losses," said Shao, speaking from a hotel suite he uses when in Rizhao in this eastern province.
"If buyers cannot resolve the issue, they may also cancel future shipments."
Shao declined to say if his company had also defaulted or had any plans to. In 2013, Sunrise cancelled shipments from Japan's Marubeni Corp. due to Brazil port congestion.
Some Chinese commodity buyers have previously threatened to default, or cancel cargoes, to force sellers to take lower prices.
Shao estimated that the companies behind the 20 shipments had booked between 80-100 cargoes for delivery between April to July, most of which were sold by Marubeni.
Benchmark futures for the oilseed in Chicago have gained 14 percent this year. Honouring these deals would cause Chinese buyers to incur a loss of as much as $7 million per shipment, said Shao, as he juggled with multiple phone calls and numerous text messages during the interview.
Marubeni is the biggest soybean exporter to China, shipping about 16 million tonnes a year along with Gavilon, which it bought last year, or about a quarter of the country's annual imports of 60 million tonnes.
A Marubeni spokesman declined to comment, citing confidentiality agreements with customers and suppliers.
Risk of Bankruptcy
Trading firms in China are battling with weak demand for soymeal. Crushers, confronted by negative margins, are also unwilling to accept cargoes at current prices.
"If they take these cargoes, some could go bankrupt. That's why they choose not to honour the contracts," Shao said.
In a sign of the pressure the sector is under, China's Dongling Grain & Oil said it expected to post a loss of 202.8 million yuan ($32.60 million)in the first quarter, versus a net profit of 8.2 million yuan previous year.
Shao said his estimate on the 20 shipments at risk of default was based on discussions with other crushers and trading firms in Shandong province, who held a meeting last week.
"Marubeni is deluded in thinking that payments will come once the cargoes have sailed," said an industry executive also based in Shandong, who declined to be identified
With so many shipments at risk of a default, Chinese buyers now have a upper hand in bargaining for lower prices.
"Most of the cargoes will eventually be sold to China. This will force sellers to renegotiate prices, which will benefit buyers," said Gao Yanbin, an investment manager with agriculture trading firm Shanghai Shenkai Investment Co. Ltd.
Chinese demand for soymeal, used in poultry feed and the main product made from soybeans, has been hit by bird flu outbreaks, cutting demand by as much as 30 percent in the first quarter compared with normal months, analysts said.
Shao estimated demand for soymeal could fall 15 percent from year ago as farms had been reluctant to restock poultry after heavy losses last year.
"We don't expect demand nor prices to improve in the next one or two months," he said, adding China's monthly imports between April to July would be more than 5 million tonnes.
Tight Credit, Worsening Cash Flow
China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.
Traders estimate more than 10 million tonnes of soybeans, out of China's imports of 63.4 million tonnes last year, are imported for financing annually.
Sunrise, which has 5,700 employees and 27 billion yuan ($4.34 billion) in assets according to its website, launched a financial services firm in 2009, which offers small scale loans.
Banks, once content to rake in profits from the lending, have been spooked by growing losses at crushers and trading firms and have begun tightening credit.
"They are asking for more a higher deposit to opening a LC (letter of credit) nowadays; before it was set at 10 percent of the contract value but banks have gradually raised the level to between 20-30 percent," said an executive at a trading firm.
Industry sources said the hike has severely crimped traders' cash flow, with weak demand leaving them with high inventory they cannot liquidate fast enough.($1 = 6.2220 yuan)