6 Min Read
* Says probe may hit metal it owns at China's Qingdao port
* Shares plunge more than 8 perent to lowest this month
* Other global banks and trade houses also caught up in probe
* Scandal has raised broader worries about metal financing in China (Adds second Chinese port denying affected by probe, context, updates markets)
By Donny Kwok and Melanie Burton
HONG KONG/SYDNEY June 10 (Reuters) - CITIC Resources Holdings Ltd said on Tuesday that metal it owns at Qingdao port may be affected by a probe into suspected fraud, the latest firm caught up in a scandal that has raised broader worries about the risks of metal financing in China.
The probe at the Chinese port, where a third-party firm is suspected of using single cargoes of metal multiple times to obtain financing, has also shaken markets amid fears the problems could extend to other ports and force a crackdown on using metal as collateral for finance.
The investigation into the status of aluminium and copper products stored at the world's seventh-biggest port may hit the group, CITIC Resources said, sending its shares down by more than 8 percent to their lowest since May 7.
The firm said it has sought a court order in Qingdao 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 while Citi Group said it would work closely with authorities, warehousing companies and clients to resolve any issues.
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 port official told Reuters they were not affected by the investigation at Qingdao and business was normal. The official said Penglai Port owned the bonded metal warehouses, rather than them being managed by a third-party warehouse firm or operators.
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 raw material importer 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.
To protect its interests, CITIC said it had applied to the Qingdao courts on June 3 to obtain sequestration orders in respect of the group's alumina and copper. It did not elaborate.
China's Qingdao Port International Co. Ltd. said last week it was assisting in the investigations on fraud related to metal financing but neither the company nor its employees were implicated.
It said its Dagang branch was asked by the Public Security Authority, China's police and security administration, 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.
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 $6,636 a tonne on Tuesday, but analysts and traders warn that the market remains vulnerable to the risk of the Qingdao probe triggering 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)