A number of customers have been defrauded in the purchase of steel from China.
This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection. We will explain how debt collection works in China below.
On the one hand, China is the world’s largest steel exporter. China’s exports represented about 15 percent of all steel exported globally in 2019. The volume of China’s 2019 steel exports was almost double that of the world’s second-largest exporter, Japan.[1]
On the other hand, customers from the United States to Nigeria, and from the United Arab Emirates to Brazil, have complained about being defrauded, or at least default, in purchasing steel from China.
There is a common characteristic in all these transactions: the Chinese exporter is only a steel sales company.
Normally, steel sales is the only registered business of this kind of exporter and their office space is usually in an office building, which implies that they have no factories and manufacturing capacity.
It would be better if they were trading agents for certain steel mills, for at least they have stable suppliers.
But in most cases, exporters may not buy products in China’s open market until receiving the deposit, which means the supply chain is less reliable.
Steel price in China shows great fluctuations, which would disrupt the supply chains of these exporters.
The price of iron ore and the supply of coal fluctuate constantly, which causes fluctuations in the manufacturing cost of steel accordingly.
The Chinese government is also adjusting its support for infrastructure, resulting in relentless changes in domestic demand and the price of steel.
If the Chinese exporter does not have a stable supply chain, it is likely that the price agreed upon before is not enough for him to buy steel, after receiving your deposit, at a reasonable price in the changing market.
In this case, he will either keep asking you to increase the payment, or deliberately delay delivery. In short, your deal will be messed up.
So, how can steel buyers avoid such fraud or default?
You’d better conduct due diligence on the Chinese exporter beforehand to determine whether it is only a sales company or an affiliate of a steel mill, for the latter could ensure a more stable supply chain.
You need an agent in China to help you urge the Chinese exporter to stock goods as soon as possible and to do an inspection before shipment.
You can also ask the actual controller of the Chinese exporter to guarantee the transaction so that he cannot be exempted from liability under the pretext of the limited liability of the company.
Of course, if the costs are manageable, you can also ask the Chinese exporter’s bank to guarantee the deal.
[1] https://legacy.trade.gov/steel/countries/pdfs/exports-china.pdf
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Photo by Max Zhang on Unsplash
Contributors: Meng Yu 余萌
