Mainland iron ore traders starved of credit as banks clamp down

Mainland iron ore traders are being starved of credit by banks reining in loan approvals and curbing letters of credit, industry sources and bankers say, as a clampdown on financing deals in the world's top consumer of commodities gathers force.

The moves come after the mainland's banking regulator urged more checks on iron ore financing deals to cut default risks and amid an official probe into suspected metal financing fraud at Qingdao's port.

The funding squeeze may force small traders to sell their stocks and pressure already weak prices, stoking banks' concern that smaller traders may fail to repay trade loans.

"Tighter credit will exacerbate the oversupply situation in the market and will send iron ore prices even lower," said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.

The Qingdao port investigation further underscores lenders' jitters over commodities financing. While the probe is centred on deals involving copper and aluminium, it could spread to iron ore, industry sources say.

Mainland banks, the major lenders to the iron ore trade, had increased their scrutiny of iron ore financing in the past two months, traders said.