China Commodity Financing Seen Falling by Goldman Amid Probe

Jun 10, 2014 6:10 am ET

(Updates with iron ore financing in 12th paragraph.)

June 10 (Bloomberg) -- Foreign banks are projected by Goldman Sachs Group Inc. to lend less money against commodity inventories in China amid a probe into metals stockpiles in the biggest consumer of raw materials.

Claims that single batches of copper and aluminum at Qingdao Port were pledged as collateral for multiple loans risks undermining a broader practice in which traders use everything from iron ore to rubber to get funding. The investigation is already weighing down copper prices and may curb foreign exchange inflows to China, according to a report by Goldman.

The probe may affect metals stockpiles at the northeastern port held by Citic Resources Holdings Ltd., the trader controlled by China’s largest state-owned company said today. Standard Chartered Plc said last week it was reviewing financing to some companies in China and Standard Bank Group started looking at “potential irregularities” with metals at Qingdao. Citigroup Inc. said it would work closely with authorities and warehousing companies to resolve any problems for clients.

“The developments in Qingdao are likely to continue the significant scaling back of FX inflows from foreign banks into China via commodity financing business,” analysts at New York- based Goldman said in the report dated yesterday. “As foreign banks reduce their exposure to Chinese commodity financing deals, the profitability of these could be reduced meaningfully.”

Price Drop

Copper in London may fall to $6,200 a metric ton before the end of this year, analysts including Roger Yuan and Max Layton said in a report. Benchmark three-month futures on the London Metal Exchange slumped 9.7 percent this year and traded at $6,645 at 5:45 p.m. Shanghai time, putting them on course for the lowest closing price since May 1.

Currency flows may be affected because Chinese borrowers often use commodities as collateral to get low interest loans from overseas lenders in dollars. They then bring the money onshore to invest in the nation’s higher interest rate environment before later repaying the sum.

Qingdao Port said in a June 6 statement that public security authorities were probing alleged fraud involving material held in its Dagang bonded storage area.

Public security authorities in Qingdao have not responded to calls by Bloomberg News seeking comment.

“The authenticity of warehouse receipts is critical to the practice of inventory financing in bonded warehouses,” Barclays Plc analyst Sijin Cheng wrote in a report last week. “Feedback from trading house contacts suggests that this investigation has cast a pall on the financing trade as a whole.”

Port Shares

Shares of Qingdao Port International Co., which listed on the stock exchange in Hong Kong on June 5, have fallen 3.5 percent from their offer price to $HK3.63 today.

The investigation is into the owner of some metals and a third party storing them in the Dagang area and not Qingdao Port itself, according to the June 6 statement.

“The company continues to provide regular port services to other clients and for all metal ore products, including aluminum and copper products,” it said.

Separately, some Chinese banks have raised margins for letters of credit for iron ore financing to as much as 50 percent from as much as 30 percent previously, said two people with knowledge of the matter.

Others reduced overall credit available for iron ore financing and set a cap on credit used in some locations including Rizhao, a port located about 100 kilometers (65 miles) southeast of Qingdao, according to the people, who asked not to be identified because they aren’t authorized to speak publicly.

Locked Gates

The Dagang area has been sealed and gates to the area are chained and padlocked, Reuters reported. The amount of metal involved in the probe was about 20,000 tons of copper, almost 100,000 tons of aluminum ingots and about 200,000 tons of alumina, Reuters said, citing a source it didn’t name.

Jiangxi Copper Co., China’s biggest smelter of the metal, said the problems at Qingdao don’t represent a systemic risk and won’t hurt demand or production of industrial metals.

As well as industrial metals, Qingdao port also handles iron ore and agricultural commodities including cotton and rubber.

Shanghai is China’s biggest port and storage center for industrial metals. Copper inventories in bonded zones in Shanghai were estimated to be about 815,000 tons in April by CRU, a London-based consultant. Citrine Capital Management LLC said in June that stockpiles in bonded warehouses across China may be about 900,000 tons.

The probe will make China’s banks “extremely cautious” about financing deals, though lenders will continue to help fund shipments to end-users, Colin Hamilton, Macquarie Group Ltd.’s head of commodities research, said June 4.

Some copper may be moved from China to LME warehouses in South Korea, and possibly Singapore and Malaysia, Jeremy Goldwyn, head of business development in Asia for Sucden Financial Ltd., said June 5.

--With assistance from Glenys Sim in Singapore, Fox Hu in Hong Kong, Jae Hur in Tokyo and Feiwen Rong and Steven Yang in Beijing.