Is the metal stored in a Chinese warehouse really there? Has the peanut oil shipment a bank lent money against been swapped for worthless water?
These and other basic questions have begun to play on the minds of traders and bankers doing business in the world’s No. 1 importer of raw materials after an investigation was launched at Qingdao Port — a huge trading hub in China’s Shandong Province — to determine whether more than one license had been issued against the same material.
The duplication, which leaves someone out of pocket when they claim what they thought was theirs, may be the result of deliberate fraud by a company using the same metal to raise multiple loans.
On Friday last week, Qingdao Port said it was asked by the Chinese Public Security Authority to help with a probe into aluminum and copper products under the name of a third-party cargo shipment agency on behalf of a cargo owner.
The port officials did not say how much metal was involved, but said that it was an “immaterial proportion” of its total annual throughput, adding that none of its employees were under investigation.
Yet in a country where oversight of commodity warehousing is generally accepted as weaker than in developed financial centers, the case is making people nervous.
Already, some copper cargo being held at Qingdao is being shipped to warehouses outside the country that are regulated by the London Metal Exchange (LME), industry sources said, in what one trade executive called a “classic flight to quality.”
“When we were there [in Qingdao], we did hear a couple of traders holding the same title,” said an iron ore trader at a global trading house who was at the port at some point in the past few days.
“One was saying that one [cargo] belongs to me; the other trader said it belongs to him. They had the same document,” the trader said.
The trader, who declined to be identified, said his stock was financed by Bank of China (中國銀行) and the Industrial & Commercial Bank of China (中國工商銀行).
“They called us to physically go down with them to start taking stock,” he said. “It took us a couple of hours, but one thing is for sure, you can sense that the bankers are worried.”
A full-blown scare at Qingdao and beyond would affect more than just the supply chain and prices of commodities.
Raising money using copper, iron ore or soybeans as collateral for relatively cheap loans is a big business in China, a ready source of credit for investors who can then pour the funds into other ventures, such as property. Such fundraising is becoming increasingly important in China as banks become stricter in extending credit.
Commodity finance deals in China were worth as much as US$160 billion, or about 31 percent of the country’s total short-term foreign exchange loans, Goldman Sachs said in March.
The immediate fallout from the investigation could make such financing in China — already under scrutiny by authorities — even harder and costlier.
“Since the Qingdao case, we, as well as others in the market, have become a lot more cautious and are very selective on who we trade with,” the head of a metals unit at a Chinese state-owned trading firm said.
“As for us, we are now only willing to work with big trading companies, those with which we’ve had a long-term working relationship or companies that have solid finances. This will be the strategy for many of us until we get more clarity,” the unit head said.
Standard Chartered said it is reviewing metals financing to a small number of companies in China. Three sources said the lender had suspended new metal financing to some customers in the country.
An executive in charge of commodity financing at an Australian bank said lenders would pause to take stock of how serious the problem in China was.
“If it’s concentrated around one particular firm, we can probably quarantine it in that way and get ourselves back to a level of comfort relatively quickly,” he said.
“If there’s not already, it probably points to the fact that there needs to be a central registry of warehouse receipts,” he added.
Copper prices on the LME hit one-month lows on Friday last week, amid concerns that owners of physical metal in China spooked by events in Qingdao will look to sell, while others may shift their stocks to LME warehouses elsewhere.
The main problem for everyone in the business — be it commodity users, traders, banks or investors — is uncertainty.
“The [Qingdao] probe has sparked a lot of fear in the metals market,” a senior executive at a major metals brokerage said. “The unverified rumors about the size of the scam and the companies involved is causing people to panic.”
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