China's Anti-Corruption Drive Causes Global Tremors: 800,000 Tons of Copper Could Hit the Market

The threat to the copper market isn't missing metal, it is from the end of copper financing deals. The worry is that, if the problem is very wide spread, it will end the financing arrangements and push all of the copper held as collateral into the market.

Here's the WSJ on the latest in the financial market: China Metal Probe Weighs on Copper Outlook
Hedge funds and other money managers are building up short positions in the global copper market, according to U.S. data, riding on allegations of fraudulent metal-backed financing in China to amplify pressure on prices of one of the world's most heavily traded metals.

From a Chinese article: 青岛港丑闻或引发金属价格进一步下跌
Traders also said that since the port scandal broke, clearance time of imported metal has been extended. Customs now need 15-20 days, or even a month to complete clearance of copper cathode, in the past only takes 7-10 days.

Headquartered in Hong Kong, a commodities trading company's management said that the situation is getting worse, in May there has been decline in imports, in June and July imports decline may be greater. The executives said that it is difficult to issuing letters of credit from banks in China to imports of copper and other metals.

The outside world that a third or more of the imported metal in China is used as collateral for loans from the Chinese shadow banking system. Shadow banking is a huge network of basic credit unregulated. A vast inventory of these metals moved in and out FTZ, instead of being used to meet the actual demand.

The concluding part of the Chinese article below:
Many traders hope the Qingdao Port can announce the findings as soon as possible, otherwise it will be spread to more traders. If the banks continue to tighten credit policy, at the end of the year many traders will have more financing problems.

And worse yet to come.

A non-ferrous metals analyst at Jinrui Futures analysis told the Southern Weekend reporter: At present, in all of the country's Free Trade Zones there is a conservative estimate of 800,000 tons of copper. The copper is stored in the bonded warehouses for a reason, for financing collateral. These are basically foreign financing credit lines, if the maturity is not extended, the copper will certainly be shipped. One direction is the general trade import declaration, the other is transferred to LME warehouses. No matter which direction will the sudden increase in supply of several hundred thousand tons of copper.

The bad news still hasn't finished.

In the article below, "Germany" is "Dezheng," the company at the center of the port scandal.
Original title: Qingdao Port Sample: Chinese anti-corruption triggered a global market turmoil

Early June 2014, Qingdao City, Shandong Province, a business owner lost contact, gradually causing a stir pile global commodity trading markets black swan event, the New York Stock Exchange July Comex copper prices fell 2 percent of. In ten thousand kilometers away, the executives of a number of foreign banks began to fidget.

German companies are called accident Resources Holdings Co., Ltd. (hereinafter referred to as Germany are resources), the company was involved in the same batch of alumina and copper warehouse cargo repeated fraudulent loans pledged to various banks.

Store these goods Qingdao Port (06198.HK), 2014 年 6 月 6 日 published announcement that starting May 31, Dagang Branch's public security authorities to assist with the investigation of a fraud case and notified the court, according to the owner Application seized a number of metal products. On this day, a time when Hong Kong-listed Qingdao Port, the stock crashed below the issue price.

As China's third largest foreign trade port, Qingdao port is one of the major ports in the world commodity trade, a huge amount of iron ore, rubber, cotton and other raw materials stored at the port warehouse. And China is the world's largest consumer of commodities.

Subsequently, on June 9, CITIC Group, CITIC Resources (01205.HK) issued a notice, saying on June 3 deposited on alumina and copper Qingdao Port apply for and obtain seizure orders to Qingdao court.

Soon, Qingdao Decheng surfaced Mining Ltd., which is headquartered in Qingdao, a private mining company - a subsidiary of Germany's positive Resources Ltd., the same batch of cargo suspected of alumina and copper warehouse repeated pledge to different Bank of defrauding the purchase price.

June 14, Southern Weekend reporter went to his office - a three-story house, the public security authorities are investigating the evidence, non-employees are not allowed to enter. Until press time, police still did not leave, even at night it was left behind.

Germany is building out from the staff to the Southern Weekend reporter that each employee have been questioning for several hours, after which they do not come to work. Southern Weekend reporter here also encountered a lot of people with the German bank and its affiliated companies are concerned, they came from all over to inquire about the situation, trying so hard to preserve some of its assets to reduce losses.

In front of business building integrated Qingdao Port, a four or five football fields enclosed yard, ingots stacked three or four meters high, the public security organs also in this guard. Copper and aluminum businesses of Qingdao Port, stalled.

June 17, CITIC Resources issued a notice once again that in the implementation of the Qingdao court seizure order, the company failed to store in Qingdao Port of about 12.3446 million tons of alumina be seized.

Incident took place in China, the world's largest consumer of the commodity, quickly dragged into the global market downturn.

Bank check "Hong Kong"

Qingdao De Heng Law Firm Agents of banks being sued Germany's case, his lawyer told the Southern Weekend reporter, the court has to stand up more than one hundred cases involving amounts in millions more.

Chen Feng did not think Germany is resource and old customers actually led to the greatest risk of local events.

International Business Qingdao Chen Feng worked for a state-owned bank branches. In his memory, with Germany being the resource of cooperation from the beginning of 2006. Over the years, Germany is now the bank's business has been very stable, about two million line of credit.

But in mid-May 2014, the first extension allows Chen Feng had a trace of vigilance - Germany is accounting told him that by the end of April was the boss Chen Hung assist in the investigation group, a problem the company back section, but the boss will soon be out.

Old customers based on trust, Chen Feng, a statement issued in the loan being repaid to help German current letter of credit.

But I did not expect that the situation worsened in early June. Just before and after the application of CITIC Resources seizure order, the banks flocked collection.

According to the regulatory authorities in accordance with local banks specific statistics reported, "De positive line" current exposure for a total of 10 billion yuan. According to the list of bank credit was provided when the investigation Chan, Germany is currently the Department of the total credit facility in Qingdao local financial institutions 14.8 billion yuan, involving 17-18 home banking.

However, because Germany is the company's complex, statistical data is still ongoing, digital still evolving.

"Germany is the largest customer of the banks in Qingdao, a very strong position." Chen Feng said. For example, Germany is the largest state-owned lender is a bank, its provincial branch in Qingdao, Germany is the provincial branch of direct credit customers is approximately 2 billion.

After the incident, the Qingdao Municipal Government to intervene quickly, the People's Bank, the Banking Bureau, the Finance Office, SAFE, the Public Security Bureau, Commission for Discipline Inspection in accordance with the division of labor, established several working groups.

Finance Office requires banks to find out the whole "Germany is the Department," the stock and the balance of the case. Chen Feng filled out a pledge of goods containing the name, number, credit amount, the form of goods regulated company name, reported to the Finance Office.

Meanwhile, Chen Feng soon report to the head office, the head office is found in Germany, Guangdong, Inner Mongolia, Xinjiang, many affiliates from credit system. "Is the relationship between the upstream and downstream from the check out, just look at the options simply do not see," said Chen Feng, "Head to one investigation of these companies."

According to his understanding, the Qingdao Municipal Government's attitude is to go the bank to justice, first sued. But as for the preservation of property, to unified action by the Qingdao Municipal Government - Ministry of Justice Chen Feng Zeng and colleagues together to Qingdao court for preservation, but the court did not accept.

"Qingdao also prevent banks do try to steal assets, banks take measures only in accordance with the final decision of Qingdao." Chen said.

Qingdao De Heng Law Firm Agents of banks being sued Germany's case, his lawyer told the Southern Weekend reporter, the court has to stand up more than one hundred cases involving amounts in millions more.

Germany is one incident, Chen Feng worried pledge of other goods in the port of Qingdao unsafe, he tried to contact the Qingdao port inspection of goods, but with no time on the grounds of Qingdao Port, does not fit.

According to sources close to the port of Qingdao: Qingdao Port has just listed soon after the listing is being done to integrate changes in the organizational structure adjustment and involved personnel, and not too much effort to manage the awful trouble.

Chen Feng to Qingdao Port in the negotiations on the day, he met bankers came from Xinjiang.

This bank is "Germany is line" in Xinjiang affiliates open letters of credit, are secured by the German resources, and signed a regulatory agreement with the port warehouse bonded warehouse, involving an amount of 400 million yuan. They are seen after the news of the accident is Germany, came to the preservation of assets.

"We went to Chittagong warehouse investigation, said it is checking cargo warehouse, not allowed to enter." Above Xinjiang banking sector to the Southern Weekend reporter said that, under normal circumstances, holding warehouse receipts can pick up. But in Dagang, holding goods warehouse is not found, because now a mess, "They took the warrants do not know what a bunch of goods, do not know which boat over, do not know who the owner is."

According to its estimates, before the local police investigation is completed, Qingdao port may not have any answers.

"In this enterprise strength, but also the normal operation if there is a repayment ability, but now the public security authorities took over the business, business stoppage, the future is difficult to predict." Chen Feng said it was his worst fears.

Disaster from warehouse receipts pledge

Both letters of credit and trade finance warehouse receipts, commonly used in many foreign banks, but also the direction of the Bank of China (601988) development efforts.

This case is Germany from Piandai resources, from warehouse to repeat the pledge.

Pledge of warehouse receipts financing this business in foreign countries has been a hundred years of history.

Enterprise products or raw materials to warehouse management, warehouse warehousing company out to prove to enterprises, companies as collateral to banks for loans. In the course of warehouse receipt financing, the warehousing company played an intermediary role and the guarantor.

In 2000, when the Shenzhen Development Bank launched the pledge of warehouse receipts financing business, which is the first domestic bank to carry out this business.

After Minsheng Bank (600016), China Everbright Bank (601818) and so opened this business, but the actual amount of financing is not large. Data show that in 2010 the three major domestic commodity futures market value of 18.185 billion yuan daily standard warehouse receipt, warehouse registrations 1,658,200 tons, of which the number of standard warehouse receipt financing accounted for less than 5% of the bank.

In China, the real rise in trade finance after 2008. At that time, the United States continued to zero interest rates, while the RMB appreciation trend apparent arbitrage, arbitrage space. Copper product attributes and its financial attributes to become trade channels in a suitable carrier.

Industrial and Commercial Bank of China (601398), for example, in 2008, the bank determines the domestic trade finance business focus of the next three years as part of its credit structure adjustment made to realize within three years of trade finance loans accounted for over 20% of all planning.

Trade financing enables banks to obtain large amounts of foreign exchange earnings, management fee income and other financial income, without increasing the cost of capital of the bank's risk premise, substantially increased the intermediary business revenue.

In addition to warehouse receipt financing, credit financing is also an important trade financing.

For example, the import business to the bank to deliver 20% of the total imports of electrolytic copper deposit, followed by banks to companies out 90 days or 180 days credit. After about a month to get the business in copper spot, and quickly sold, equivalent to have a 60 days or 150 days in the short-term financing. If we add the yuan appreciation, importers can also get additional foreign exchange earnings.

In many cases, letters of credit and warehouse both ways simultaneously, often even as a system: the front of the letter of credit expires 3-6 months companies had to take ownership of the goods, the goods into the warehouse to obtain standard warehouse further financing.

These financing in foreign banks is a very common practice, the bank or the direction of development efforts in China.

Goldman Sachs research report pointed out, iron ore, copper and gold are China being the most used collateral for financing, but also includes soybeans, palm oil, rubber, nickel, zinc and aluminum. The current size of the financing of goods in China has reached 160 billion U.S. dollars, accounting for 31% of China's total short-term external debt.

However, some daring enterprise in order to get more funding, began playing the idea of ​​repeating the pledge of warehouse receipts, which is not regarded as something new in the field for many commodities. Germany is the resource of this accident is suspected of repeated pledge to defraud lending, triggered the uproar.

However, a number of Qingdao trade circles to the Southern Weekend reporter said the Qingdao Port is involved in the investigation of repeated pledge copper and aluminum, accounting for Qingdao Port is not large proportion of the goods. In the industry, copper imports are larger than Shanghai Port and Ningbo Port (601018), alumina imports places Lianyungang (601008) based.

May this year, the data show that Shanghai Bonded copper stocks to 750,000 -78 million tons, Qingdao Bonded copper stocks 60,000-72,000 tons GFTZ stock 30,000 -4 tons.

Transnational warehouse fall

Qingdao warehouse reputation, because Germany is the event has greatly affected. Even foreign warehouses are no longer reassuring.

2013, the Yangtze River Delta region has erupted steel trade credit default risk of the industry. At that time, the bank found that steel prices as collateral has shrunk dramatically, while the steel trading business and warehouse conspired to create false warehouse receipts, repeated pledge to further amplify risk. So, deep in the steel trade financing chain one time bomb, detonated gradually.

And steel trade warehouse receipt pledge financing is different, copper, aluminum major players in trade finance for foreign banks and foreign warehousing. That so many people have been considered relatively safer.

Germany is the resource before the accident, did not expect from Liu Zhe, bonded warehouse warehouse foreign repeated pledge problems will appear.

Liu Zhe has fought in Qingdao trade circles for five years, he founded the company based chemical raw materials, but also incidentally do some copper ingots trade.

In his impression, in 2011, have occurred in the warehouse storage company deliberately "enhance" the value of the goods, and not allowed without permission of lading Bank case. Later, the bank will require companies to cooperate on copper warehouse.

In Qingdao, Copper Bonded warehousing company are usually foreign companies, which issued warehouse receipts, delivery of goods directive also been recognized internationally. Foreign banks are basically only recognizes foreign warehousing company's warehouse.

June 5, media reports said Germany's positive resource company - Qingdao Decheng Mines Ltd. and four different storage company warehouse receipts were issued to different banks to repeat the pledge, the actual exposure of more than 1 billion yuan of bank loans . Warehouse receipts and actual warehouse where there are gaps, involving 100,000 tons of alumina and a couple of thousand tonnes of copper.

Southern Weekend reporter from a number of informed trading community Qingdao, four warehouses were GKE, CWT, and science hall and Wing Hung.

This four storage warehouses are established companies in the industry have a certain reputation.

Singapore warehousing service provider GKE 51% stake in the company by the global commodities business giant Louis Dreyfus control, with the London Metal Exchange Center (LME) authorized to approve base metal delivery warehouse as part of its global logistics services. According to published reports, GKE its shareholders that the company is evaluating the impact of its investigations of Qingdao Port.

Xun Tong Group (CWT) was founded in 1970 and listed in Singapore in 1993. Church and science (Shanghai) Co., Ltd. Warehouse incorporated in October 2005 in Shanghai, is Pacorini directly under the company.

Ever Talent Warehouse is headquartered in the UK, the London Metal Exchange-approved designated delivery warehouse.

But as of press time, the Southern Weekend reporter failed to contact the four storage company.

"How would not think this would be an accident four warehouses, industry believe that their management ability and professional ethics, which are generally recognized by foreign banks warehouse." Liu Zhe evaluated. In general, banks are believed warehouse warehouse warehouse holding them, just want to make a phone call to confirm, does not need to inspect the goods to the warehouse.

However, cross-border warehouse is not foolproof. According to Qingdao, a local commodity trade sources, in Qingdao Bonded warehouses and a number of domestic warehouse agent system, not a multinational warehouse direct operation.

Qingdao warehouse reputation, because Germany is the event has greatly affected. Liu Zhe in that, foreign banks have not been required to Qingdao Port transhipment to the London Metal Exchange (LME) warehouses in Singapore or Korea warehouse (China currently does not allow the establishment of LME warehouses in the territory).

Germany is the shock wave

"Some of the banks Qingdao commodities business are suspended, saying it was a command, such as the head office." If the banks continued to tighten credit policy, traders are likely to have more money chain problems.

Many traders Qingdao to the Southern Weekend reporter confirmed in the port of Qingdao public security organs investigated at the same time, Qingdao Port suspended copper ingots of delivery, the goods shall be shipped out during the investigation.

Traders who obviously felt the recent delivery from Qingdao Port speed is also much slower than before. Some Qingdao importers began to require suppliers to be replaced by other port cargo.

"Now, no one should warehouse in Qingdao, Shanghai, many people are reluctant to warehouse receipts." Worried about the presence of the goods stored in the port of Qingdao duplication pledge, foreign purchases of Qingdao providers will also be included in the list of early warning the.

Panic spread to banks, spread to copper, aluminum outside the chemical, rubber and other bulk trade varieties.

"Some of the banks Qingdao commodities business are suspended, saying it was a command, such as the head office." Person Qingdao, a joint-stock bank, told the Southern Weekend reporter.

Processing time becomes longer credit, originally issuing three days can now be extended to five days, and to provide more proof of the authenticity of the documents of trade, the right to audit the branch level also received from some branches.

In fact, from the beginning of 2014, the bank notified the SAFE several times, requiring investigation capital flow and goods flow mismatch or inflow of larger enterprises.

May 5 this year, the State Administration of Foreign Exchange issued a "Notice of inflow management issues on the strengthening of foreign exchange funds" under the new rules within the jacket greatly increases the difficulty of Lee.

Outside, a jittery banks. According to media reports, Citigroup, Standard Chartered, Standard Bank, ABN Amro, BNP Paribas and the French bank may be involved in foreign trade Germany is the case.

"As far as I know, discount business, Deutsche Bank has been suspended, such as the reopening of things to notice a lot of foreign banks to suspend the pledge of warehouse receipts, even if there is no pause is also cut in half the amount." One local trade in Qingdao Manufacturers said, "Chinese foreign traders no longer believe the line of credit is the most terrible."

Many traders lament to the Southern Weekend reporter, hoping Qingdao Port can announce the findings as soon as possible, otherwise it will be spread to more traders. If the banks continued to tighten credit policy, traders will have more problems at the end of the money chain.

And worse yet to come.

A non-ferrous metals analyst at Jinrui Futures analysis to the Southern Weekend reporter: At present, the country's Free Trade Zone, where a conservative estimate of 80 million tons of copper, the copper stored in a bonded warehouse reason, for warehouse receipt pledge financing. These are basically foreign financing credit lines open, if the maturity is not extended, the copper will certainly be shipped. One direction is the general trade import declaration, the other is transferred to LME warehouses. No matter which direction will the sudden increase in supply of several hundred thousand tons of copper.

The bad news does not end there.


  1. Why would so much credit not be extended? If anything, the discovery of missing copper and the still high demand to take and give credit will increase demand for them to take on more copper security, not release all of it... I don't understand that reasoning -- for it to all ship would be the entire system collapsed, and if that were the case there would be far greater problems than copper prices, and the PBOC will never allow that when they still have so many tools to prop up those extending credit to keep the economy alive.... i dunno that's what we've been thinking all weekend at least, who knows for sure, right

    1. They wouldn't release all of it, but right now credit is tight because the banks don't know who is a good credit risk and who is a bad one. As long as that remains the case, there will be pressure on some borrowers to move their copper if it is no longer useful as collateral.

    2. but what about political pressure? PBOC was pressuring lenders even before this with the lower rates and lower reserve requirements... if lenders tighten up again PBOC will likely just pressure them again, no? PBOC cannot afford too much tightening of credit because I would guess that the one thing they fear more than a collateral controversy is an outright credit collapse leading to social unrest... I mean, look at the lengths the West goes to prop up lenders and banks; I would guess the PBOC has not only even more ability but even more willingness and mandate to do so because the power of the politburo depends on it...

      i'm not professing, mind you... i really don't know for sure yet. but I just can't imagine right now the PBOC allowing lenders to tighten up too much. I think it'd be more likely for them to just make an example of a borrower... you know, strike some fear into the hearts of borrowers, a witch hunt a la anti-corruption, to make an example of anyone that would dare scare lenders into worrying if the borrower is a good credit risk or not....

      or something like that would certainly carry much less macro and political risk than just letting lenders tighten up at a time when it's clearly the PBOC mandate to prevent that... I think

      of course this is bigger picture, i could certainly see a week or two of tightening depending on how quick lenders react, and then how quick PBOC reacts.

      great analysis, in any case, BTW... i'm genuinely not being critical, just curious to discuss various possibilities.