Trade

China imported meat market in turmoil, as buyers seek to renegotiate deals after prices plummet

Jon Condon, December 17, 2019

 

REPORTS of Chinese buyers reneging on contracts on beef and other imported proteins have emerged this week, as imported meat prices in the country continue to plummet.

After climbed dramatically over a four-week period from late October, imported beef prices into China have crashed equally alarmingly over the past few weeks.

Beef Central first started to pick up the trend in this report, published last week.

The events of the past fortnight are arguably the most dramatic in Australia’s international beef trade seen since the Russian imported beef market collapse in 2008, when dozens of Russian customers walked away from contracts, leaving Australian containers on Russian wharves, and sending some exporters in Australia broke.

The latest market impact in China is being seen in all imported proteins including mutton, lamb and pork, as well as beef.

Price shift

While the industry does not yet have access to a reliable public indicator price on beef trade into China, the US imported 90CL market acts as a proxy for China prices, as both customers compete for the same product.

As China trade momentum built to record levels during the back half of this year, fuelled by the outbreak of ASF in domestic pigs and subsequent massive protein deficit, the 90CL imported indicator rose dramatically from mid-October, reaching an unprecedented A972.5c/kg CIF on November 21. That was up more than 200c/kg or 27pc in just four weeks. Since then, however, the market has dropped like a stone, shaving off much of those gains in an even shorter period.

Because of delays in posting, MLA’s most recent (12 December) 90CL indicator price of 867c/kg does not yet capture the full extent of the decline, Beef Central was told.

Export trade sources said price drops of 20-25pc have been seen on some cuts and items into China, over an alarmingly short period. 85CL manufacturing beef went from US254c/lb in October to 310c/lb, before crashing again to 233c/lb in trading out of Australia on Friday.

Other exporter countries servicing China are experiencing the same pressure, if not worse. Brazilian five-cut mixed hindquarters (inside/outside, knuckle, rump and shin shank) which were trading only a couple of weeks ago at US750c/kg have been renegotiated this week at US580-590c/kg, representing a drop of close to US$2/kg. Seven-cut Brazilian forequarter sets that had been booked at US680c/kg were being renegotiated at US500-520c/kg.

One source suggested there was 100,000 tonnes of already sold South American beef on the water to China, that was now under jeopardy, or at least exposed to severe price re-negotiation.

Immature market

The common view among trade sources spoken to this week has been that the latest development is clear evidence that China remains a ‘very immature, higher-risk market’ for Australian beef.

It is well known that one of the largest export processors in Australia has had a risk management strategy in place for some years, selectively avoiding trade into China where possible, to try to avoid such incidents. Ultimately, though, the sheer size and momentum of China trade has forced the company to enlarge its China exposure this year.

Government intervention

Another regular trade contact said there had been ‘vast numbers’ of South American exporter companies that had been forced to renegotiate prices in shipments to China recently, that had fallen dramatically in value since shipment. In one Brazilian company’s case, some hundreds of containers were involved.

“The recent market spike, which saw imported meat prices in China rise at least 20pc virtually overnight a month ago, left the Chinese Government with ‘little choice’ than to open up stocks of government-bonded product in order to relieve retail price pressure,” he said.

South American exporters have flooded the China market recently, with Brazil exporting more than 80,000 tonnes a month to the country in October and November.

“Certainly the China market is having a major wobble – it perhaps had to happen, given how quickly and steeply prices rose last month – but it is no fun for anybody involved in the trade at present,” the trade contact said.

“That’s especially so when there’s (Chinese) government intervention in the market. The Australian exporter has done everything right, got the deposit, sold the product, and the customer is left holding the can. It makes for a very unstable market.”

Asked what was happening to product consigned earlier, where prices had now changed and the customer no long wanted to take delivery at that price, a trade source said some of it would be held in bond at the port, but ‘all sorts of other scenarios’ could emerge.

While Australian exporters are not yet nearly as badly impacted as those in South America, Beef Central can confirm that some Australian exporters have been forced to renegotiate prices on prior shipments this week. Mutton and lamb have also been affected.

One exporter said in his company’s case, payments out of China were still being made, but had become increasingly slow this month. “It does feel a little bit scary at the minute, given what has happened,” he said.

He suggested the market into China shot up to at least 950c/kg (FOB, A$ equivalent) on 90CL manufacturing beef in late November, and was now in the 800c range.

Another exporter told Beef Central this morning that he had seen US240c/lb CIF bids out of China today on 90CL trim, on product that was selling for 310c only two weeks ago.

“It went down as quick as it went up, and has now lost 20-25pc at least on many items, in just a couple of weeks,” he said.

“It could not have happened at a worse time,” he said. “With the approach of Chinese New Year, the ports are full, and everybody is rushing for boats, and space is tight. It’s a high-stress time at the moment, for all involved in the China trade.”

‘Necessary evil’

The contact said events like this should make all meat traders more wary about doing business into China, but the fact was the sheer size of the market meant it was now a ‘necessary evil.’

“How does a beef supply chain go and buy cattle and do what they do, without China? They’ve got the best price, in a lot of cases,” he said.

He suggested the biggest price impact was not being seen on premium loin cuts, or speciality brands like Wagyu or certified grainfed Angus, but the ‘yield items’ like round cuts, offals, and trims. Bones, alone, could be worth $30-$40 a head into China recently.

The contact said many Chinese importers were now short of cash, given the extreme high rates of importation that had been seen in October and November, and were starting to ‘dump’ large stocks of South American beef, especially, to generate cash flow.

“Because our supply has not been so extreme, the Australian imported market has held up relatively well – but it is still being seriously impacted,” he said.

Sales contracts with Chinese customers are typically written on 30pc deposit, and some accounts have arisen of Chinese customers walking away from their deposits, because the reductions in meat price were greater than 30pc in value.

The same thing happened in Russia in 2008, with large quantities of Australian beef left on the docks in Russia, after the meat price collapsed overnight. It took months to shift some of the product into alternate, lower-paying markets – often having to be frozen first – and some other customer countries would not accept it at all.

For some exporters around the world, options to sell product sitting on the wharf in China to somewhere else are very limited. Korea will not accept China-labelled meat, and Japan may not, depending on the source.

“This episode is going to be a wake-up call for the export trade into China, that the bigger the party, the bigger the hangover”

“It means the exporter either has to discharge and cop the renegotiated discount by selling into China, or bring it back home, at the exporters expense,” a trade source said. “There are no other options, at equivalent prices. In days gone by product like this would have simply been diverted into another, similar market.”

One positive out of the current events was that Australian beef product continued to trade at a premium over other imported supplies in China, due to its shelf-life, brand credentials and overall reputation.

“But this episode is going to be a bit of a wakeup call for all involved in the export trade into China. The bigger the party, the bigger the hangover,” the trader said.

Australian imported beef prices into the US this week also appear to have softened, as the China dramas unfold and competitive buying pressure eases. One source suggested 95CL manufacturing cow beef was now back around 850c, or less.

Trade sources said there appeared to be very little beef trade occurring this week into China, as a result of recent events, saying it was perhaps a ‘good thing’ that export processors were about to close for their Christmas holiday break, taking some of the supply pressure out of the market for a few weeks.

Has the market slide bottomed?

The common question being asked around the industry this week is, Has the China market hit the bottom yet?

“It’s really hard to know,” one trade source said. “I’d say we are close, and I think the best thing that can happen now is some Christmas processing plant closures over the next couple of weeks, to lighten supply and provide some breathing space,” he said.

“But it would only take one of the bigger export players to need to sell a bit of meat, and it could easily bring the China market back another US10c/lb or more.”

 

 

 

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Comments

  1. Dick Morgan, December 18, 2019

    I agree with Sue Grant. What an exporter needs when dealing with a risky market is for the buyer to establish, before shipment, a ‘without recourse irrevocable letter of credit confirmed by a first class international bank’. Unless, of course, he is dealing with a respected buyer that he has been successfully doing business with on unsecured payment terms for years. Even then things can go wrong and maybe he should have export payments insurance cover. Is the old government funded Export Payments Insurance Corporation (EPIC) still operating?

  2. Sue Grant, December 18, 2019

    So is the moral of the story don’t export to China without an irrevocable L/C confirmed by a solid bank?

  3. Always be very careful putting too many of your “eggs” in the China basket.
    They have the ability and will to turn off market access on a whim, leaving your product unsold or at “go broke” prices.

    Full names required for future reader comments please Greg, as per our long-standing comment policy accessible in the about us section. Editor

  4. Very useful for commodities buyer

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