* China is investigating a private metals trading firm -
* Other global banks and trade houses also caught up in
* CITIC Resources says probe may hit metal it owns at
China's Qingdao port
* Scandal has raised broader worries about metal financing
By Fayen Wong and Donny Kwok
SHANGHAI/HONG KONG, June 10 China is
investigating a private metals trading firm over a suspected
metal financing scam at Qingdao port, police sources said, as
CITIC Resources Holdings Ltd warned that metal it owns at the
port may be affected by the probe.
The investigation at the port, the world's seventh largest,
is examining whether warehouse receipts were duplicated so that
a cargo of metal could be used multiple times to obtain
The news has hit metal prices, reflecting market fears about
business practices in China and worries that the probe could
spread to other ports and prompt a crackdown on using metal as
collateral for finance.
China's Qingdao Port Authority and the city's police are
investigating a private metals trading firm, Decheng Mining,
over a suspected metal financing fraud at the port, two police
sources with direct knowledge of the matter said.
A staff member at Decheng Mining's Qingdao office, who would
only give his surname as Liu, would not comment and a
Singapore-registered associate company did not respond to a
series of calls requesting comment.
The investigation into the status of aluminium and copper
products stored at China's third-biggest port may hit the firm,
CITIC Resources said. Its shares closed 9.8 percent
lower on Tuesday, in their biggest decline since January 2009.
That compared to a 0.9-percent gain in the benchmark Hang Seng
The firm said it had sought a court order in Qingdao on June
3 to secure its metal assets.
CITIC Resources is the commodities trading unit of China's
biggest and oldest state-owned financial conglomerate company,
CITIC Group Corp. Singapore sovereign wealth fund Temasek
Holdings also holds an 11.46 percent in the unit.
"At present, the status of the investigation is unknown to
the group," chairman Kwok Peter Viem said in a filing to the
Hong Kong stock exchange.
"Until the status of the investigation is clarified, the
company is not able to accurately assess its impact on the
group's alumina and copper stored at Qingdao port or on the
group itself," Kwok added.
Banks and trading houses have been checking their exposure
to the port and others to see if they are at risk from the
issuing of fake receipts.
China's metals sector could have its access to funding
squeezed and copper prices could come under renewed pressure if
new cases arose.
CITIC joins Standard Bank Group and a part-owned
unit of Louis Dreyfus Corp, Singapore-listed GKE
Corp., which warned last week of potential losses.
Standard Chartered has said it is reviewing metals
financing to a small number of companies in China and
acknowledged there are issues in China around commodity.
Arun Murthy, global head of comomodities at Standard
Chartered, also said in an email response to Reuters on Tuesday
that commodity financing remained a key focus for the bank and
it would not pull out of the business in China.
SECOND PORT DENIES PROBLEMS
Pledging commodities to a bank, often using a warehouse
receipt as proof of ownership, has become a popular way of
raising finance in China, often to skirt restrictions on raising
credit and helping drive up stockpiles at some ports.
The Wall Street Journal, citing people familiar with the
matter, reported Western banks were concerned that a potential
fraud has flared up at a second Chinese port, Penglai, also
located in Shandong province,
A Penglai port official told Reuters they were not affected
by the investigation at Qingdao and business was normal. The
official said the port owned the bonded metal warehouses, and
they were not managed by a third-party warehouse firm or
But while the problems at Qingdao may be an isolated case,
questions have begun to play on the minds of traders and bankers
doing business in the world's largest commodity consumer into
whether material they believe they own is secure.
Concerns over the events in Qingdao may push foreign banks
to cut their commodity financing business in China, Goldman
Sachs said in a note on June 9.
"We believe the developments in Qingdao are likely to
continue the significant scaling back of FX inflows from foreign
banks into China via commodity financing business."
In March, the bank estimated commodity finance deals in
China were worth as much as $160 billion, or about 31 percent of
the country's total short-term foreign exchange loans.
COPPER PRICES AT ONE-MONTH LOW
Prices of copper have fallen to one month lows since news of
the investigation broke last week, while premiums paid for
physical metal in Shanghai have nearly halved.
According to industry sources, traders have shipped out some
metal from Qingdao Port to more regulated London Metal Exchange
warehouses in the region to cut risk and raise funds.
Benchmark LME copper traded just above one month
lows of $6,628 a tonne on Tuesday, but analysts and traders warn
that the market remains vulnerable to the risk of a wider
unwinding of financing deals.
(Additional reporting by Melanie Burton in SYDNEY and Fayen
Wong in SHANGHAI.; Editing by Ed Davies and Amran Abocar)