The probe at Qingdao port centers around a private metals trading
firm suspected of duplicating warehouse certificates in order to use
a metal cargo multiple times to raise financing.
Some banks have asked clients to shift metal, used as collateral for
loans, to more regulated London Metal Exchange (LME) warehouses
outside China or those owned and operated by a single warehouse firm
to limit their exposure.
"The banks still haven't looked under the hood," said an executive
at a bank involved in commodity financing in China, referring to
China's warehousing sector.
At the heart of the issue is China's roaring commodity financing
business, which has helped drive up stockpiles of commodities at
ports to record levels, stored in warehouses not always regulated to
the same extent as elsewhere.
Though many global firms are involved in the warehouse industry in
China, there has been outsourcing to local firms to cut overheads
and avoid dealing with complex local regulations.
Using commodities as collateral in financing in China is common
practice and not illegal, but issuing receipts to repeatedly
mortgage an asset is fraud and could leave more than one creditor
holding claims to the same collateral.
Illustrating how difficult it may be to unravel competing claims,
China's CITIC Resources Holding Ltd said that a court had been
unable to secure more than 100,000 tonnes of alumina stored at
Traders said there was a risk the metal could have been already
claimed before part of Qingdao Port was sealed off, adding that at
least two trading houses had moved metal out as soon as news of the
CITIC Resources said it would conduct its own investigation and was
considering further legal action.
In Qingdao, sources with knowledge of the probe said authorities
were looking at whether the firm under focus, Decheng Mining, had
secured multiple warehouse receipts because an affiliate managed
logistics at the port's Dagang bonded zone.
Phone calls to Decheng Mining and its parent firm, Dezheng
Resources, seeking comment were not answered. Officials at Qingdao
port could also not be reached.
"Warehouse receipts are not title documents, they are documents of
entitlement. But they are being used as title documents for sales
and purchase and transfer of ownership," said a person at a
warehouse company with operations in Qingdao.
"Everywhere else outside of China, a warehouse receipt is cut for
A source at a Western bank with direct knowledge of Qingdao said
warehouse firms should bear the brunt of responsibility, while a
senior official at a warehouse firm at the port said responsibility
"remains very much up in the air."
A lawyer, who has previously been involved in litigation over
fraudulent warehouse receipts, said banks primary recourse would be
against whoever had forged receipts.
"But if the fraudster is gone, the bank may decide that it wants to
go against the warehouse," said the lawyer, who did not want to be
named because of the sensitivity of the issue.
A warehouse operator and a banker said agreements with clients meant
there could be limited liability for a cargo, capping a payment at
around $100,000, depending on specific terms and conditions. For
example, a shipment of 10,000 tonnes of copper would be worth about
$68 million at current prices.
Even if banks or their customers have insurance for the metal, some
warehouse sources said they might struggle to get paid if fraud is
uncovered or their agents are implicated.
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Singapore-based GKE Corp., a part-owned unit of Louis Dreyfus Corp,
CWT Ltd and the metals warehousing arm of Glencore, Pacorini Metals,
are among global firms involved in the warehousing business in
GKE said on June 16 to the best of its knowledge management or
employees were not implicated in the port investigation.
Spokesmen for Glencore and CWT declined to comment.
A firm that appears to have steered clear of the current problems at
Qingdao is C. Steinweg Handelsveem B.V., the world's largest
independent metals warehousing and logistics firm.
The Dutch firm, which does not operate in the Dagang area of the
port where the fraud probe is centered, does not contract out
logistics operations to third parties and usually owns its
warehouses, according to traders, bankers and warehouse sources.
Steinweg declined to comment.
As well as potentially benefiting firms owning and operating
warehouses, the Qingdao probe has prompted some movement of metal to
LME-approved warehouses in locations such as South Korea.
The LME, which is owned by Hong Kong Exchanges and Clearing Ltd, has
approved more than 700 warehouses and storage facilities in about 40
The exchange is keen to break into the Chinese market, where it is
not currently permitted to license warehouses.
The LME sets down specific requirements for warehouse firms it
licenses, such as evidence of adequate capital and insurance, as
well as regulating metal movement and conducting audits.
"The extension of the LME's warehouse network into mainland China is
an important issue for the LME and its users and we alongside HKEx
put a high priority on this initiative,” said a LME spokeswoman.
A person at a warehousing company in Singapore said that countries
where the LME operates the "the confidence level is much higher"
with a regulatory system in place.
But the reverberations from the Qingdao probe may not be clear cut,
since global warehousing firms potentially exposed to the scandal
are licensed by the LME to operate in other ports. The LME declined
to comment further.
One thing looks certain, however, banks involved in commodity
financing in China are set to charge higher fees.
"The cost is certainly going to go up, whether it's going to be from
local banks or international,” said analyst Colin Hamilton of
Macquarie in London. ($1 = 6.2090 Chinese Yuan Renminbi)
(Additional reporting by Rujun Shen in SINGAPORE and Susan Thomas in
LONDON; Editing by Ed Davies)
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