Exclusive: Ghost warehouse stocks haunt China's steel sector

SHANGHAI Sun Sep 16, 2012 3:07pm EDT

An employee walks past columns of steel as she works at a steel production factory in Wuhan, Hubei province, August 2, 2012. REUTERS/Stringer

An employee walks past columns of steel as she works at a steel production factory in Wuhan, Hubei province, August 2, 2012.

Credit: Reuters/Stringer

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SHANGHAI (Reuters) - Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.

China's demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.

As defaults have risen in the world's largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.

Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world's steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.

"What we have seen so far is just the tip of the iceberg," said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. "The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry."

VERIFY RECEIPTS

The Shanghai government's asset regulator said that it had sent a note to state-owned firms in August asking them to verify receipts for stored metal on financing deals they had with steel traders.

Police have arrested an employee from Baoyang Warehouse in Shanghai and are investigating documentation for steel stocks that the employee issued to a trading firm, said an official with the surname Ou at Baoyang. Baoyang is owned by China Railway Materials Shanghai Company Limited.

Reuters was unable to contact a member of the police force that could comment on the investigation.

The trade firm used the stocks more than once as collateral to obtain loans, said an executive at Shanghai Minlurin, another trading firm that had steel stocks in the warehouse. The receipts used were for steel worth around 380 million yuan ($59.96 million), the executive said.

Similar cases have prompted some trading houses to temporarily halt transactions related to warehouse receipts, disrupting China's steel business, traders said.

"We have suspended business for days as we are afraid we won't be able to get any stocks from the warehouses if we get a fake receipt," said one Shanghai-based trader.

BANKS BOOST MONITORING

Banks, too, are giving less credit against warehouse receipts.

"Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans," said a Shanghai-based branch manager from a Chinese bank who declined to be identified as he was not authorized to speak to the media.

Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.

Industry sources estimated cases that have already come to light account for about 5 billion yuan ($787.50 million) of bad debt in Shanghai, one of China's biggest steel trading centers.

At another warehouse, a logistics unit of giant steelmaker Baosteel rented a small office to a company called Shanghai Yiye Steel Trade Market Management Co Ltd. Documents were forged stating Yiye was the owner of some of the steel stored in the warehouse, said Wang Xueying, the spokeswoman for the unit called Shanghai Baosteel Logistics Co Ltd.

Yiye used the documents in dealings with two companies, China Railway Harbin Logistics and Wuhan Iron Yitong, the spokeswoman said.

The two companies came to the warehouse to collect the stocks only to find that Yiye did not own the materials, she said. The case is still under investigation, she added.

Nobody answered telephone calls to Yiye made by Reuters to request comment for this story. Both China Railway Harbin Logistics and Wuhan Iron Yitong declined to comment when contacted.

($1 = 6.3376 Chinese yuan)

(Editing by Simon Webb and Ed Davies)

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Comments (4)
DustyOR wrote:
Nothing surprises me about the Chinese……..
Years ago we lived on Taiwan when dad was a Navy officer and I remember how fed up dad was dealing with them in business involving the Navy……
I am not speaking about Taiwanese, I am speaking of dealing with Chinese……….
I remember he said he would much rather deal with Japanese as he had years before when we were stationed in Japan.

Sep 17, 2012 3:43pm EDT  --  Report as abuse
Overcast451 wrote:
You notice now how people won’t outright be striahgt up about anything… instead of the factual truth: “The firms lied and/or stole the collateral” – it’s called “Ghost warehouse stocks” now, lol!

THIS is why humanity has so many problems fixing it’s problems – much of humanity can’t even be honest enough about the problem to fix it.

I tell my kids all the time: you can lie to yourself and think that the tire is causing your car to smoke, but no matter how many times you replace the tire, the smoking won’t stop – until you are honest about the nature of the problem; you simply cannot fix it.

So call it what it is: Deceit, Lies, Theft… not ‘ghost inventory’ – see, that won’t work for me, if I go into Kohl’s and put ‘ghost inventory’ in a bag and walk out with it – I get busted for theft, lol.

But alas; one more example of how the common man and the ‘rich’ man are treated differently – eventually, to the demise of humanity – eventually..

Sep 18, 2012 9:41am EDT  --  Report as abuse
Overcast451 wrote:
You notice now how people won’t outright be striahgt up about anything… instead of the factual truth: “The firms lied and/or stole the collateral” – it’s called “Ghost warehouse stocks” now, lol!

THIS is why humanity has so many problems fixing it’s problems – much of humanity can’t even be honest enough about the problem to fix it.

I tell my kids all the time: you can lie to yourself and think that the tire is causing your car to smoke, but no matter how many times you replace the tire, the smoking won’t stop – until you are honest about the nature of the problem; you simply cannot fix it.

So call it what it is: Deceit, Lies, Theft… not ‘ghost inventory’ – see, that won’t work for me, if I go into Kohl’s and put ‘ghost inventory’ in a bag and walk out with it – I get busted for theft, lol.

But alas; one more example of how the common man and the ‘rich’ man are treated differently – eventually, to the demise of humanity – eventually..

Sep 18, 2012 9:41am EDT  --  Report as abuse
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