| QINGDAO, China/SINGAPORE, June 9
QINGDAO, China/SINGAPORE, June 9 Is the metal
stored in a Chinese warehouse really there? Has the peanut oil
shipment a bank lent money against been swapped for worthless
Basic questions have begun to play on the minds of traders
and bankers doing business in the world's largest raw material
importer, after an investigation began at Qingdao Port, a huge
trading hub in the northeast, into whether more than one licence
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
The case of Qingdao, the world's seventh-largest port, has
yet to play out and could be an isolated problem involving one
or a handful of companies, rather than endemic at ports.
But for many Western traders eyeing the gargantuan growth of
China's commodity demand, credit is a touchy issue that brings
back memories of the 2008 financial crisis, making them
especially jumpy when credit related issues arise.
On Friday, Qingdao Port said it had been asked by China's
Public Security Authority to help with an investigation relating
to aluminium and copper products under the name of a third-party
cargo shipment agency on behalf of a cargo owner.
It did not say how much metal was involved, but said it was
an "immaterial proportion" of its total annual throughput, and
added 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
centres, the case is making people nervous.
Already, some copper cargoes being held at Qingdao are 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 in the last 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 source, who declined to be identified because he was not
authorised to speak to the media, said his stock was financed by
Bank of China and Industrial & Commercial Bank of
"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."
FINANCING COULD GET HARDER
A full-blown scare at Qingdao and beyond would not only
affect the supply chain and price of commodities.
Raising money using copper, iron ore or soybeans as
collateral for relatively cheap loans is big business in China,
a ready source of credit for investors who can then pour the
funds into other ventures such as property.
It is also increasingly important in China as banks become
stricter in extending credit.
Commodity finance deals in China were worth as much as $160
billion, 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," said the head of a metals unit at a
Chinese state-owned trading firm.
"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."
Standard Chartered said it was 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."
Greater oversight of Chinese warehousing is needed to reduce
the risk of future lapses, say China legal experts.
In one ongoing case, an operator allegedly allowed someone
to enter his warehouse and replace peanut oil with water,
steadily eroding the value of the collateral, according to a
partner at a top law firm who is located in Hong Kong.
The switch came to light when the financing bank went to
claim the collateral.
MORE FALLS FOR COPPER?
Copper prices on the LME hit one-month lows on Friday, amid
concerns that owners of physical metal in China who have been
spooked by events in Qingdao will look to sell, while others may
shift their stocks to LME warehouses elsewhere.
"The countries where the LME is, the confidence level is
much higher... and of course there is a (regulatory) structure
in place," said one source at a warehousing company.
The LME, owned by Hong Kong Exchanges and Clearing
, has warehouses in many countries, but it is not
authorised to license warehouses in China and does not operate
in Vietnam or Thailand or Indonesia, for example.
Hundreds of thousands of tonnes of copper that will
ultimately be used in the car or construction industries sit in
Chinese warehouses, notably in Shanghai, and much of it is
believed to be tied up as collateral for lending.
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," said a senior executive at a major metals brokerage.
"The unverified rumours about the size of the scam and the
companies involved is causing people to panic."
(Additional reporting by Melanie Burton in Sydney, Polly Yam in
Hong Kong and Ruby Lian in Shanghai; Writing by Amran Abocar;
Editing by Mike Collett-White and Alex Richardson)