The alleged scam - in which a Chinese trading firm is suspected by
local authorities of fraudulently using a single cargo of metal as
collateral for multiple loans - has shaken the confidence of banks
and merchants in Western metals storage firms that rely on local
agents to oversee warehouse operations.
It has intensified a battle between new entrants and entrenched
rivals in the multi-billion dollar business of securely storing the
world's commodities in China, the world's biggest producer and user
of base metals.
As Goldman ponders a possible move into China, Western warehousing
companies already operating there, including Glencore Plc unit
Pacorini Metals and Trafigura-owned Impala [TRAFGF.UL], are
scrambling to defend their turf.
They are looking at ditching local agents in favor of setting up
their own domestic operations to oversee warehousing assets
directly, seven sources who work for warehousing companies or use
them to store their metal said.
Detroit-based Metro International Trade Services, a major
warehousing company that Goldman bought in 2010, is looking at
setting up shop in Shanghai and other bonded locations in the
country, a source familiar with the matter told Reuters.
"Western banks and other types of financiers want an alternative to
what's already there," the source said.
A spokesman for Goldman declined to comment. The possible move comes
at a critical time for the bank. It is looking to sell Metro amid
pressure from U.S. regulators and lawmakers, who are concerned about
Wall Street banks' involvement in the physical commodities market.
The investigation by police in the Chinese port city of Qingdao
centers on a private metals trading firm, Decheng Mining, and its
related companies that allegedly used fake warehouse receipts for
about 340,000 tonnes of copper, aluminum and alumina, the key
ingredient for making aluminum.
Western banks including Standard Chartered, Citigroup Inc, Standard
Bank Group, and merchants including Mercuria have disclosed exposure
amounting to almost $1 billion.
Following the revelations, banks and traders with metal in Qingdao
and elsewhere in China have raced to check the metal actually
exists, move it into depots considered more secure and protect
themselves from potential losses, sources said.
With banks facing hefty losses and financing terms in China
tightening, it's not clear if these steps by the warehousing
industry to repair the damage will be enough to restore confidence
in the long term.
"This (scandal) is changing the nature of the warehousing business
significantly. Using third parties is not a viable model anymore,"
said a source at a major merchant that has metal stored in China.
Steinweg, a 167-year-old Rotterdam-based firm, is looking to expand
its vast footprint in China by leasing more sheds in Qingdao, as
well as Shanghai and other locations in China, two sources familiar
with the move told Reuters.
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Unlike some rivals, Steinweg carved out a niche in the burgeoning
China market by operating and controlling its own depots, rather
than using local agents, sources have said.
The company leases storage space, often located in free-trade-zones
in ports, and has its own staff to monitor the stock itself.
More than 100,000 tonnes of copper has already flowed into its sheds
from rivals' depots since the scandal broke, one of the sources
said. That is equivalent to about one-fifth of all the copper
stockpiles estimated to be held in bonded storage in Shanghai, and
nearly as much as the London Metal Exchange's global inventories.
The company declined to comment on the expansion. It operates in 11
locations in China, according to its website.
Goldman's Metro unit would likely copy the Steinweg business model
of running and controlling its own sheds if it decides to make a
move into China, sources say.
For now, Steinweg's model appears to have paid off as skittish banks
and merchants pressure warehouse operators to prove there is no
chance of their stockpiles getting mixed up with other customers'
Other warehouse companies are scrambling to catch up. They include
CWT Commodities owned by CWT Ltd, Pacorini Metals, Impala, Henry
Bath owned by JPMorgan Chase & Co, and GKE Corp, which is a unit of
Louis Dreyfus Corp.
Sources familiar with their plans said they were either stopping
using local firms and hiring their own staff to run their sheds or
were considering doing so.
JPMorgan is in the process of selling its physical commodities
business, including the warehousing unit, to Mercuria.
The companies all declined to comment.
(Additional reporting by Polly Yam in Hong Kong, editing by Ross
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