China port probe into metal financing rattles banks, trade houses

[June 05, 2014]  By Melanie Burton and Ruby Lian

SYDNEY/SHANGHAI (Reuters) - Global trading houses and banks were scrambling to check on their exposure to a probe into metal financing at China's Qingdao port, as concerns grow that a crackdown into commodity financing could hit trade in the world's top metal buyer.

The investigation at the world's seventh largest port is looking into whether single cargoes of metal were used multiple times to obtain financing, according to industry sources. This means different banks and trading houses were holding separate titles for the same metal. The inquiry has revived concerns about the impact of China's deepening credit crisis on its metal imports, much of which piles up in warehouses to be used as collateral.

"Now the banks are all flying down to the port and literally, together with the warehouse people and the traders, are physically counting the stocks," said a source at a global trading company who visited the port this week.

"When we were there we did hear a couple of traders holding the same title. One was saying that one (cargo) belongs to me the other trader said it belongs to him. They had the same document."

Standard Chartered on Thursday became the latest to say it was monitoring the situation at Qingdao.

Standard Bank Group and a part-owned unit of Louis Dreyfus Corp [LOUDR.UL], Singapore-listed GKE Corp., also warned on Wednesday of potential losses.

A spokesman for Trafigura [TRAFGF.UL] said this week that the trading house was following events at the port and gathering information.

Another major player Glencore, which also uses the port, declined to comment earlier this week.

Copper prices in London fell to their lowest in more than three weeks on Wednesday, partly due to worries over the probe, though prices steadied on Thursday. [MET/L]

On Wednesday, Standard Bank said it had started an investigation into potential irregularities at Qingdao port.

The bank, whose Standard Bank Plc subsidiary conducts commodities trading, was responding to media enquiries relating to concerns over stocks of metal held in bonded warehouses at the port.

"Standard Bank Group is not yet in a position to quantify any potential loss arising from these circumstances," it said.

The bank said it will work with the local authorities as part of its investigations.

IRON ORE RECEIPTS

Authorities at the port in north east China have not officially confirmed an investigation, and have said exports and operations are running normally.

But Xinhua news agency reported that the port had said it was investigating whether iron ore warehouse receipts were fraudulently used multiple times to raise finance from different banks.

Trading and warehousing sources also told Reuters some shipments of copper and aluminum into the port had been disrupted, relating to an investigation into the use of metal as collateral in financing.

Traders estimated 80,000 tonnes of aluminum and 20,000-45,0000 tonnes of copper with a combined value of $285-$460 million could be affected by the investigation.

According to traders and warehousing sources, port authorities at Qingdao's Dagang wharfs have been examining whether there had been multiple issuing of receipts for single cargoes of metal tied to a trading company and linked companies.

Logistics provider GKE Corp warned shareholders on Wednesday that the investigation by port authorities might affect the business of a metals logistics unit in China.

"The company is currently assessing the potential impact of the investigation to the business," GKE said.

(Additonal reporting by Manolo Serapio in Singapore, Polly Yam in Hong Kong and Susan Thomas in London; Editing by Erica Billingham and Ed Davies)

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