Javier Blas is the FT's commodities editor
Over the last two weeks, Chinese consumers of thermal coal and iron ore have been defaulting on their contracts, sending prices sharply down.
The reason behind the cancellations is a hotly debated topic in the physical commodities market.
Analysts and traders have put forward two radically different theories - with almost opposite implications to global commodities markets: either Chinese buyers do not need the raw materials because weak demand and high inventories - a bearish scenario - or they need the shipments, but they are defaulting to take advantage of falling prices and they plan to rebook at a lower costs - neutral to bullish.
The market has experienced both hypotheses at work: after the start of the global financial crisis of 2008, Chinese buyers defaulted en masse as demand vanished.
But in 2010, when fears about the euro zone sent prices down, Chinese customers defaulted on their shipments, only to rebook their cargoes shortly after at much lower prices.
Commodities traders tell me that probably both theories are at play.
Chinese commodities demand is lacklustre and inventories are indeed high. Electricity production, a proxy for thermal coal needs, rose only 0.7 per cent last month, a large slowdown from double digit figures in 2011 and earlier this year.
Moreover, thermal coal stockpiles at Chinese utilities rose last week to the equivalent of 26 days of consumption, up 62.5 per cent from 16 days in the same period of a year ago, according to the China Coal Transport and Distribution Association.
But the wave of defaults only started after iron ore and - particularly - thermal coal prices fell about 10 per cent, breaking key resistance levels.
The benchmark iron ore contract - 62 per cent iron content - fell last week in Singapore to $130.5 a tonne, the lowest since early November 2011.
Thermal coal prices in the Australian port of Newcastle, the benchmark for Asia, fell to $93.5 a tonne, the lowest since October 2010.
The price drop left some Chinese domestic traders, who usually do not hedge the price risk of coal and iron ore, suffering big losses. That is when the chain of deferrals and defaults gained pace, with a dozen cargoes left in the water.
Commodities traders say this week will be critical for sentiment: if Chinese buyers take the defaulted cargoes - at a lower price after negotiations.
The mood could improve if the wave of defaults is a reaction to the price fall rather than a genuine fall in demand.
But if price negotiations do not reach a quick conclusion and Chinese buyers continue to say that they do not need the material, the market could take another hit.
Moreover, the amount of distressed cargoes looking for an owner in the Asia-Pacific market is quite significant, raising the prospect of some traders executing fire-sales.
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