Col­lat­eral dam­age from Qing­dao probe

In­ves­ti­ga­tions into ir­reg­u­lar fi­nanc­ing us­ing cop­per send global prices lower, re­port­sWei Tian from Shang­hai

China Daily (Canada) - - BUSINESS -

Cop­per mar­kets are be­ing shaken by de­vel­op­ments at Qing­dao Port, where metal in­ven­to­ries have re­port­edly been used in fraud­u­lent ways to raise funds.

Of­fi­cials are look­ing at whether metals stock­piled at Qing­dao Port fell short of obli­ga­tions used to se­cure loans, and they’re fo­cus­ing on Decheng Min­ing, a Qing­daobased pri­vate metals trader, Reuters re­ported, cit­ing two po­lice sources with di­rect knowl­edge of the mat­ter.

Pub­lic se­cu­rity au­thor­i­ties are prob­ing al­leged fraud in­volv­ing ma­te­ri­als held in its Da­gang bonded stor­age area, Qing­dao Port In­ter­na­tional Co said in a state­ment on June 6.

Claims that sin­gle batches of cop­per and alu­minum at Qing­dao Port were pledged as col­lat­eral for mul­ti­ple loans could un­der­mine a broader prac­tice un­der which traders use ev­ery­thing from iron ore to rub­ber to get fund­ing.

Bench­mark cop­per fu­tures in Lon­don have fallen amid con­cern that the probe at Qing­dao will curb de­mand for the metal. Cop­per has lost 9.2 per­cent this year, mak­ing it the worst per­former among the six main metals on the Lon­donMe­tal Ex­change.

An­a­lysts at Gold­man Sachs Group Inc said the price may fur­ther fall to about $6,200 a met­ric ton be­fore the end of this year from about $6,660 at present.

Cop­per has also been de­clin­ing in New York as the in­ves­ti­ga­tion erodes de­mand prospects, with the bench­mark fu­tures price down 11 per­cent this year on the CME Group Inc’s Comex in New York.

In ad­di­tion to weigh­ing down cop­per prices, ob­servers said the in­ves­ti­ga­tion may curb for­eign ex­change in­flows to China.

“Feed­back from trad­ing house con­tacts sug­gests that this in­ves­ti­ga­tion has cast a pall on the fi­nanc­ing trade as a whole,” Bar­clays Plc an­a­lyst Si­jin Cheng wrote in a re­port.

“The de­vel­op­ments in Qing­dao are likely to con­tinue the sig­nif­i­cant scal­ing back of forex in­flows from for­eign banks into China via com­mod­ity fi­nanc­ing busi­ness,” Gold­man Sachs said, adding that for­eign banks may lend less money against com­mod­ity in­ven­to­ries in China.

“This in­ves­ti­ga­tion may lead to a ‘freeze’ in ac­tiv­ity,” Deutsche Bank AG said in a re­port. “We also be­lieve it is likely to raise mar­ket aware­ness of the risks in­volved in com­mod­ity fi­nanc­ing.”

While there is still con­sid­er­able un­cer­tainty re­gard­ing the ex­tent of fraud­u­lent trans­ac­tions, this will be an­other step in clean­ing up com­mod­ity fi­nanc­ing in China, Deutsche Bank said, adding that the move could lead to much tighter au­dit rules for ware­hous­ing re­ceipts over the medium term, which could raise the cost of re­pur­chase deals.

Some Chi­nese banks have raised mar­gins for letters of credit for iron ore fi­nanc­ing to as much as 50 per­cent from a 30 per­cent max­i­mum pre­vi­ously.

“Over the long term, how­ever, tighter con­trol will add a de­gree of con­fi­dence to the cop­per mar­ket, lim­it­ing the di­ver­gence be­tween real and ap­par­ent de­mand,” the bank said.

Chi­nese de­mand ac­counts for 40 per­cent of the global cop­per mar­ket and twothirds of the global iron ore mar­ket.

Wu Yuneng, vice-pres­i­dent of Jiangxi Cop­per Corp, the sec­ond-largest cop­per pro­ducer in China, said the al­leged scam in Qing­dao won’t af­fect China’s over­all cop­per de­mand over the long term.

“What’s hap­pen­ing in Qing­dao is an iso­lated case. It will not change the pro­duc­tion and con­sump­tion of non­fer­rous metals or al­ter the sup­ply-de­mand re­la­tion­ship in the mar­ket.

“The de­cline in cop­per prices is only re­lated to macroe­co­nomic risks and the fun­da­men­tal sup­ply-de­mand re­la­tion­ship, nei­ther of which is an out­come from Qing­dao,” he said.

“It is also pos­si­ble that this wave of price de­clines is the re­sult of spec­u­la­tive be­hav­ior,” said Xu Qiy­ong, a metals an­a­lyst with Guo­tai Ju­nan Se­cu­ri­ties Co Ltd.

Shares of Qing­dao Port, which was listed in Hong Kong only last week, fell an­other 1.9 per­cent to HK$3.53 (45 cents) on Thurs­day.

The Da­gang area in Qing­dao port has been sealed, and gates to the area have been chained and pad­locked. The amount ofmet­als in­volved in the probe is about 20,000 tons of cop­per, al­most 100,000 tons of alu­minum in­gots and about 200,000 tons of alu­mina, Reuters said.

CITIC Re­sources Hold­ings Ltd, the com­mod­ity trad­ing unit of China’s big­gest and old­est State-owned fi­nan­cial con­glom­er­ate CITIC Group Corp, said on Tues­day that metals it owns at the Qing­dao port may be af­fected by the probe.

China’s State Re­serve Bureau is check­ing that its pur­chases of cop­per in re­cent months are free of col­lat­eral risks amid the probe into metals stored at Qing­dao Port, Bloomberg News re­ported on Thurs­day.

The agency bought at least 200,000 tons of cop­per from bonded stor­age ar­eas in March and April, Bloomberg cited uniden­ti­fied sources as say­ing.

Some cop­per may be moved from China to LME ware­houses in South Korea, and pos­si­bly Sin­ga­pore and Malaysia, said Jeremy Gold­wyn, head of busi­ness de­vel­op­ment in Asia for Suc­den Fi­nan­cial Ltd.

An­a­lysts fear that the cri­sis in Qing­dao may spread to bonded ware­houses in Shang­hai, where there are some 600,000 tons of cop­per stock­piled. That’s equiv­a­lent to 2.5 per­cent of global sup­ply, so it could have an im­pact on the global mar­ket, they said.

But Xue Bao­qing, head of the non­fer­rous di­vi­sion of China Na­tional Ge­o­log­i­cal and Min­ing Corp, said there is “lit­tle chance” that the Shang­hai bonded area is also in­volved in sim­i­lar fraud, as the area that han­dles more than 80 per­cent of China’s cop­per im­ports has a sound fi­nan­cial reg­u­la­tion sys­tem.

Con­sid­er­ing that China’s eco­nomic slow­down is still within ac­cept­able pa­ram­e­ters, the coun­try’s cop­per con­sump­tion will ex­ceed 10 mil­lion tons this year, Xue said.

“China’s cop­per con­sump­tion will main­tain an­nual growth of 4 to 5 per­cent, sup­ported by ur­ban­iza­tion and the res­i­den­tial property mar­ket,” he said. Reuters and Bloomberg con­trib­uted to this story. Con­tact the writer at weitian@chi­

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