China's banking regulator has told local authorities to investigate iron ore financing conditions to better guard against risks, prompting a slump in iron ore futures prices that analysts say will lead to a reshuffle in the industry.
News surfaced that the China Banking Regulatory Commission (CBRC) on April 18 released a notice telling commercial banks to step up investigations into iron ore financing deals, risks in the area and the existence of fake trading.
Local authorities are required to submit a detailed report before April 30, according to media reports.
A CBRC insider with knowledge of the matter confirmed the news, fanning fears among business traders that banks may tighten credit requirements for iron ore imports.
"Although it is just an investigation notice without mentioning specific moves, it has put business traders on high alert," said an anonymous long-time trader of commodities.
Affected by the news, iron ore futures tumbled around 5 percent at midday on Monday.
Denied of other financing channels amid government efforts to reduce overcapacity, some Chinese steel mills have turned to iron ore imports to obtain credit from banks that led to mounting stockpiles at Chinese ports.
Iron ore inventories at the 33 major Chinese seaports amounted to 108.31 million tonnes as of April 28, according to the Xinhua-China Iron Ore Price Index released on Tuesday.
With China's steel industry experiencing the most difficult period since the start of the century, authorities are closely monitoring possible financial risks arising from the sector.
More than 45 percent of steel companies reported losses as growth hit an 18-month low of 7.4 percent in the first quarter, according to Monday's report by the China Iron and Steel Association.
Traders have already reported stricter requirements for seeking credit from banks for fear of default risks.
An unnamed banker from Shanghai told Shanghai Securities News that his bank started to tighten financing for commodities trade earlier this year to contain risks.
If the regulation tightens, the market sell-off may trigger yet another slump in iron ore prices that would lead to a reshuffle in the industry, analysts said.