(Repeats with no changes in text)
By Fayen Wong, Polly Yam and Melanie Burton
SHANGHAI/HONG KONG/SYDNEY, June 26 A warehouse
fraud at China's third-largest port has forced banks and trading
houses to consider new controls in the country's massive
commodity financing business, which traders say could lead to
drying up of credit for all but large firms and state-owned
China's commodities trading is dominated by the large and
state-owned companies but there are thousands of small firms in
the market. Faced with tougher bank requirements for financing,
they could sell down stockpiles, squeezing demand for metals and
other raw materials such as rubber in the world's biggest
consumer of commodities.
Any new requirements would also ratchet up the risk that
customers who do not regain credit lines may default on payments
for services such as hedging, or for imports.
"The fear is not so much about the big boys, but some of the
other smaller, newer players, who may have only been in this
commodity financing game for the last 2-3 years," said Jeremy
Goldwyn, a director with commodities broker Sucden in charge of
"If all of a sudden the tap is turned off to them, they
might have more of a crisis. Is it having an effect on the
market? Yes, people are very nervous. We obviously have a lot of
business in China so we are watching it very closely," he said.
According to sources, Standard Chartered Bank has
suspended some commodity financing deals in Qingdao port after
authorities there launched a probe into a private trading firm,
Decheng Mining, that is suspected of duplicating warehouse
certificates to use a metal cargo multiple times to raise
For Western banks such as Standard Chartered, HSBC
and BNP Paribas, which are restricted in the domestic
loan market in China, the metals financing business is a
lucrative alternative but the Qingdao scandal has renewed focus
on counterparty risk.
Goldman Sachs estimates that commodity-backed deals account
for as much as $160 billion, or about 30 percent of China's
short-term foreign-exchange borrowing.
Besides metals, the banks are now taking a fresh look at
loans backed by other commodities such as iron ore, soybeans and
rubber, fuelling concerns that any drying up of credit could
spark a series of defaults on trade loans, or force other
cash-strapped firms to cancel term shipments in the second half
of this year.
"In the next two months, some smaller companies may default
on term copper shipments if they cannot receive letters of
credit or if they can't find a bank to do inventory financing,"
said a trader at a large international trading house.
As they review their commodity lending business, some
foreign banks are considering measures such as getting finance
guarantees from Chinese banks for letters of credit issued to
local firms and taking on insurance with more comprehensive
coverage, bank sources said.
"If we are signing contracts with their Singapore or Hong
Kong-registered company, we may also start demanding guarantees
from the Chinese parent," said an executive at a Western bank
affected by the port scandal.
In the case of Decheng, there are worries among exposed
banks that they would have difficulties recovering the losses
because most of the financing agreements were signed with its
Singapore-registered unit, which has limited assets to pay back
creditors, said the executive.
Neither Decheng Mining, nor its parent Dezheng Resources,
could be reached for comment.
WEEDING OUT SMALLER FIRMS
For smaller end-users and trading firms, both local and
Western banks are also thinking of imposing loan restrictions
that will require shippers to prove that they already have
domestic buyers lined up for the metal, sources said - a move
that could weed them out of the commodity financing business as
they struggle to meet these tougher requirements.
These measures are set to make commodity financing in China
- already under scrutiny by authorities - even harder and
costlier, in turn helping large players, such as state-owned
Chinese firms and large end-users, get even bigger.
Chinese state-owned firms, such as Minmetals, Jiangxi Copper
International and Founder Commodities, are favoured by local and
foreign lenders alike as trading partners because of their
financial muscle. There is also a perception that Beijing would
bail out these companies if things go awry.
Authorities have not yet disclosed the amount of metal
involved in the Decheng financing probe, but sources familiar
with the matter said it was about 20,000 tonnes of copper,
nearly 100,000 tonnes of aluminium ingots and about 200,000
tonnes of alumina, the raw material for aluminium production.
That quantity of metal would be worth about $390 million at
According to Chinese business daily Caixin, Decheng's parent
company, Dezheng Resources, and its subsidiaries had borrowed a
total of 14.8 billion yuan ($2.38 billion) from Chinese banks
for trade and other loans, part of it for metal imports.
Chen Jihong, a veteran trader and chairman of Dezheng
Resources, has been detained by authorities since April and is
being investigated as part of a corruption probe unrelated to
Qingdao port, trading sources and bankers who have dealt with
With the incident putting China's sprawling warehouse sector
under scrutiny, foreign banks are also likely to demand more
stringent requirements of warehousing companies from whom they
accept inventory receipts.
IMPORT SQUEEZE AND DEFAULT RISKS
Pledging commodities to a bank using a warehouse receipt as
proof of ownership, while agreeing to buy the cargo back at a
set point in future, is a popular way to raise finance in global
It took off in China as traders sought to profit from the
difference in global interest rates in the wake of the 2008
credit crisis: borrowing in dollars to invest in China's
sizzling shadow banking markets - often through non-traditional
wealth management products linked to property - where the gap
between returns and funding costs could be as much as ten
While the Qingdao scandal has rattled global metals markets,
investigations so far suggest this is an isolated case, with
several bank sources saying that stock checks at other Chinese
ports have not found any wrongdoing.
Still, the episode has already made banks more reluctant to
grant letters of credit, even when legitimate, raising the
spectre of loan defaults and cancellation of copper imports in
the later part of this year.
Worries of a worsening credit crunch have led some companies
to sell their refined copper stocks in bonded warehouses in
Shanghai, trade sources said, putting pressure on futures and on
premiums which fell by nearly half after news of the scam broke.
Since then, banks have taken longer to approve finance for
copper imports, boosting demand for Shanghai copper stocks and
buoying futures prices. Shanghai copper hit a four
month high of 49,690 yuan ($8,000) on Tuesday.
To be sure, no foreign banks - even those that have hit by
the Qingdao saga - are thinking of exiting the lucrative
financing business permanently.
"Foreign banks are largely shut out of the domestic loans
market, with restrictions on funding and products we can offer.
But offshore trade financing, however, is one that plays to our
strength," said an executive at another Western bank.
($1 = 6.2090 Chinese Yuan)
(Editing by Raju Gopalakrishnan)