After port fraud, China's vast warehouse sector under scrutiny

GKE

22/06/2014 22:00

* Some banks ask clients to shift metal to more regulated 
warehouses 
    * China's CITIC Resources says unable to secure some metal 
    * Banks and warehouses dispute responsibility for port 
scandal 
    * LME has been trying to break into Chinese market 
 
    By Melanie Burton and Fayen Wong 
    SYDNEY/SHANGHAI June 23 (Reuters) - Shaken by a fraud 
investigation into metal financing in the world's 
seventh-busiest port, banks and trading houses have been made 
painfully aware of the risks they face storing commodities in 
China's sprawling warehouse sector.  
    The probe at Qingdao port centres 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  1205.HK  said that 
a court had been unable to secure more than 100,000 tonnes of 
alumina stored at Qingdao port. 
    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 scandal broke.     
    CITIC Resources said it would conduct its own investigation 
and was considering further legal action.   
        
    TRADING BLAME 
    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 one party."  
    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.  
     
    GLOBAL FIRMS 
    Singapore-based GKE Corp.  GKEC.SI , a part-owned unit of 
Louis Dreyfus Corp  LOUDR.UL , CWT Ltd  CWTD.SI  and the metals 
warehousing arm of Glencore  GLEN.L , Pacorini Metals, are among 
global firms involved in the warehousing business in Qingdao. 
    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 centred, 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. 
 
    BENEFIT LME?  
    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  0388.HK , has approved more than 700 warehouses and storage 
facilities in about 40 locations globally. 
   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) 
  <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
  GRAPHICS: China's Qingdao port http://link.reuters.com/hac89v 
            Copper financing  http://link.reuters.com/pez57v 
  ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 
 (Additional reporting by Rujun Shen in SINGAPORE and Susan 
Thomas in LONDON; Editing by Ed Davies) 
 ((, melanie.burton@thomsonreuters.com)(+612 9373 1803)(Reuters 
Messaging: melanie.burton.thomsonreuters.com@reuters.net)) 
 
Keywords: CHINA QINGDAO/WAREHOUSES