Disliked{quote} Okay i understand i may have jumped the gun in saying that china the coutnry would likely defaut on its obligations in your previous posts you did say something bout letters of credit being a form of payment where china wpuld have to pay cash upfront in order to buy the copper in credit but what happens when china buys copper from australia, they would probably place a letter of credit say 50% of the agreed price to acquire the full lot and upon receiving the copper pay the remaining 50% its the raining 50% that comes in question whether...Ignored
afraid that is not correct - not trying to sound all high and mighty just explaining the reality of metals trading. Customers do indeed open a letter of credit for 100% of the cargo value. i receive a customer LC, we arrange pricing, i hedge on the LME, i then prepare documents including bills of lading, assays, packing lists against the credit. this documents are sent to my bank, my bank sends them to the buyers bank, assuming the documents are clean under UCP 500 the Chinese bank are obligated to pay within 5 working days and i receive my money. a sight LC are for a full 100% payment. iron ore is slightly different generally it is 95% up front and 5% on discharge assays. if there is a default it may be between the chinese customer and the chinese bank. this will have ramifications but the point of Letters of Credit is to minimise non performance risk to the outside party selling the goods. major trade banks like BNP, standard bank etc who operate under TPA agreements with traders i.e. they provide financing and hedging lines will only agree to LC business for preciously this reason, it minimises counter party risk. what you are talking about is open terms or TT business. even in this case though the buyer has to pay on shipping docs. once i release cargo i have no way to get the other 50% you talk about. customer can simply not pay and i have no method to enforce payment.
most common form of defaults is on pricings, customers pay margin, price metal, the price collapses and they walk away from both the pricing without buying the cargo. the seller has the cargo but he has to unwind his hedge which is now out of the money. this will tend to happen in period of extreme sharp downward moves like in 2008. we had a couple of these.
