CITIC's Alumina Gone

CITIC went to court to sequester its collateral. Authorities found that more than half of the alumina is gone.
CITIC Resources says alumina missing from Qingdao port
Chinese commodities trader CITIC Resources Holding Ltd said on Wednesday that 123,446 tonnes of its alumina stored at Qingdao port were missing. The port, China's third-largest, has been at the centre of an investigation into alleged fraud.

"The company has been notified that in the enforcement of the sequestration orders obtained by the group, the Qingdao court has been unable to sequester about 123,446 MT (metric tonnes) of alumina which the group has stored at Qingdao port," the firm said in the statement to the Hong Kong stock exchange.

ZeroHedge also finds that cotton is now being affected by the rehypothecated commodities scandal as shippers wait for the Qingdao port to finalize new rules.



  1. ZH had an article a couple months back about how Chinese commodity refinancing has pushed commodity prices up except for gold, which it conversely has suppressed. I had difficulty understanding their logic in that article - were you able to make heads or tails of it?

    I think the general concept is that Chinese interest rate arbitrageurs were purchasing base metals and shorting them in the futures market. But because base metals prices are mostly determined by the spot price rather than the futures market, the overall effect was to push up the price of the base metal (despite the arbitrageur being neutral exposure). As this trade implodes (because banks are demanding the collateral), the arbitrageur will have to sell his metal and buy a futures contract to unwind his position. The sale in the spot market will push prices down more than the purchase in the futures market, hence why base metals prices are collapsing.

    As for gold, because gold is priced in the futures market more so than in the spot market, the effect is opposite. When a Chinese arbitrageur buys a ton of gold and neutralizes his exposure by shorting a ton in the futures market, the overall effect on prices was to push them down. Likewise, when the banks come'a'knockin for their collateral, he will sell it in the spot market and buy it back in the futures market, thus theoretically pushing prices up.

    Does any of that make sense?

    If this were to happen in the US I imagine the Fed would have swooped in by now and bought up the bad commodity-backed toxic loans. Any sense if China is going to repeat the late 90s again by buying up these junk loans?

    - Luke

    1. I think the industrial metals were used pro-cyclically: they were acquired for speculation as well as collateral because one party involved always seems to be a metals warehouse or metals trader. Loan proceeds were used in speculative real estate and financial ventures. Even if they hedged their collateral, they didn't hedge their investments and their investments fueled demand for industrial commodities.

      I don't know if that's the case with gold, it shouldn't be for gold used in the interest rate arbitrage. Even if someone rehypothecated gold collateral to obtain multiple loans, if they used the proceeds for interest rate arbitrage, they shouldn't have default risk.

      I think the Fed would let this debt go bad, as they did with subprime. The two are similar in the sense that, in a healthy economy, the losses are very manageable. What is more important is what all of this says about the health of the Chinese economy and the credit market (as subprime sent a signal about the overall housing market). This port scandal is China's credit bubble boiled down into a single transaction: easy credit, industrial commodity demand, real estate speculation. The tight credit market, real estate slowdown and falling commodity prices are all inextricably linked.