Highlights Banks have delayed discounting confirmed letters of credit Pakistani mills wary of entering scrap market with weakene
Banks have delayed discounting confirmed letters of credit
Pakistani mills wary of entering scrap market with weakened rupee
Regular traders of containerized shredded ferrous scrap market into Pakistan have begun to avoid selling into that market due to the rapid deterioration of the trading environment.
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This has been prompted by the sharp depreciation of the Pakistani rupee in recent weeks and low forex reserves at local banks.
The Pakistani rupee weakened to Rupee 228.563 at 4:30 pm London time on July 22 against $1, weakening 11.6% from Rupee 204.623 at the beginning of the month on July 1, according to xe.com.
Traders expressed concerns about further weakening of the Pakistani rupee and the national government’s inability to control devaluation due to a lack of US dollar reserves.
Some European and Asian banks are already starting to refuse the discounting of payments on letters of credit (LCs) from buyers in the country, multiple trading sources said.
Discounting a confirmed letter of credit occurs when a bank offers to advance a trader the letter of credit payment before the sales and shipping documents have been presented to the bank, but traders have reported delays and even rejection in this process amid concerns over Pakistani banks’ ability to fulfil payments in US dollars.
“We have refrained from offering to Port Qasim (a key scrap container terminal in Karachi, Pakistan) until fundamentals improve,” said one Singapore-based trader. “Our bank refused to discount a confirmed letter of credit [because of the situation], which was shocking — apparently, everyone is affected and looking for a way out of existing trades.”
A UK trader said lines of credit cannot be confirmed by his company’s bank.
“We have to present the documents and wait for the bank in Pakistan to pay our bank in London – it’s not an issue with the Pakistani buyers but the banks,” he said. “”The seriousness of it is scary, it’s potentially the entire country going bankrupt.”
A third trader also pointed to the letters of credit issue, offering that sellers were trying to avoid trades because of it.
According to a fourth trader, Pakistan’s inability to fix their exchange rate has also deterred scrap buyers from entering the market, adding that “people are unable to do cost estimation due to the volatility and wish to hold back.”
Market sources circulated a notification to increase domestic rebar prices in Pakistani rupees from Agha Steel Industries, a rebar mill based near Port Qasim, highlighting the difficulty faced by local finished steel producers.
“Due to the unprecedented devaluation of PKR against the USD, especially in the last one month, ensuring business continuity has become a challenge, as this parity has a direct impact on our cost of production,” the notification read. The mill raised thinner diameter rebar prices to Rupee240,000/mt and 16mm and above rebar to Rupee 238,000/mt.
However, while a second UK trader agreed that banks are delaying discounts on confirmed letters of credit, they stated that the issue isn’t yet severe enough to stop dealing with Pakistan.
A deal was reported to have been booked July 21 for 2,000-3,000 mt of containerized shredded scrap at $450/mt CFR Port Qasim, with chatter of a deal at $445/mt CFR also heard as some traders liquidated positions.
The neighboring Indian market saw an increase in offers of containerized shredded scrap since sellers began to avoid the Pakistani market.
Platts assessed Indian imports of containerized shredded scrap at $450/mt CFR Nhava Sheva July 22, down $30 on the week, according to data from S&P Global Commodity Insights.
“However, the demand [in India for shred] isn’t there to consume the volumes everyone has, so everyone is on watch-and-wait mode,” the first UK trader said.
www.spglobal.com