China probe sparks metals stocks scramble

June 10, 2014 11:21 am

China probe sparks metals stocks scramble

By Lucy Hornby

Metals traders are rushing to secure copper and aluminium stocks following a financing probe in the northeast Chinese port of Qingdao, with at least one company asking courts to freeze inventory while traders move metal to other ports to prevent possible seizure.

CITIC Resources, an arm of Chinese banking, trading and metals conglomerate CITIC Group, said on Tuesday it had asked courts in Qingdao to secure alumina – the raw material for aluminium – and copper it had stored at Qingdao Port.

At least half a dozen European, Asian and American banks fear that a private Chinese aluminium producer used the same stocks of metals as collateral against multiple loans, turning what they thought was a low-risk transaction into an unsecured loan.

An investigation is under way as concern rises over the extent of international banks’ exposure to unorthodox financing activities in China, where companies have relied on commodity-backed loans when normal bank loans are unavailable. Copper prices have fallen 3 per cent since the news broke a week ago, on fears that China’s appetite for imports would drop if banks stopped issuing such loans.

Copper for three-month delivery on the London Metal Exchange traded at $6,646 a tonne on Tuesday.

In a report, analysts at Goldman Sachs said the developments in Qingdao were likely to “continue the significant scaling back” of foreign currency inflows from overseas banks into China via commodity financing

“This would act to disincentivise the physical holding of commodities in bonded warehouses, increasing ‘visible’ inventories and placing more downward pressure on physical (cash prices) than upward pressure on futures prices,” said analyst Max Layton in the report.

Meanwhile, traders are moving stocks out of the port before they get caught in a widening probe into exactly who owns which tonnes. “A lot of our clients are worried about any impact,” said a manager at one warehousing firm in Qingdao. “They are taking copper to South Korea or Shanghai, also Japan, because they are afraid it could be seized.”

Shares of Qingdao Port International Co., which listed on the Hong Kong stock exchange on Thursday, have fallen 3.5 per cent from their offer price to $HK3.63 on Tuesday.

An employee at private Chinese aluminium producer Dezheng Resources told the Financial Times on Tuesday that media reports that its subsidiary, Decheng Mining, had raised multiple loans using the same collateral were “gossip”. When asked if the company had engaged in such financing practices, the employee said: “It’s not convenient for me to say whether such a practice exists, but all I can tell you is that we are all coming to work as normal.”

Sources in the metals industry said subsidiaries of Dezheng Resources were at the centre of the investigation, the FT reported last week. Dezheng Resources operates aluminium smelters in central China as well as in Inner Mongolia, where it also has coal mines and power plants.

Some traders said an investigation by Qingdao Port had extended to metals stored in warehouses in Penglai, a neighbouring port in Shandong Province. A port official in Penglai said that operations there were normal and he had not heard of any investigation.

CITIC Resources is the trading unit of CITIC Group, one of China’s largest investment conglomerates. CITIC Group plans to inject all its assets into a different Hong Kong subsidiary, CITIC Pacific, as part of a government mandate to attract more outside capital.