Goldman unit eyes foray into China amid metals financing scandal

GKE

29/07/2014 06:00

By Josephine Mason, Melanie Burton and Susan Thomas 
    NEW YORK/SYDNEY/LONDON, July 29 (Reuters) - Goldman Sachs 
Group Inc's  GS.N  metals warehousing unit is exploring its 
first foray into China, and privately held C Steinweg has 
expanded capacity there, sources said, as a financing scandal in 
a major Chinese port fuels a scramble for market share.     
    The alleged scam - in which a Chinese trading firm is 
suspected by local authorities of fraudulently using a single 
cargo of metal as collateral for multiple loans - has shaken the 
confidence of banks and merchants in Western metals storage 
firms that rely on local agents to oversee warehouse operations. 
    It has intensified a battle between new entrants and 
entrenched rivals in the multi-billion dollar business of 
securely storing the world's commodities in China, the world's 
biggest producer and user of base metals. 
    As Goldman ponders a possible move into China, Western 
warehousing companies already operating there, including 
Glencore Plc  GLEN.L  unit Pacorini Metals and Trafigura-owned 
Impala  TRAFGF.UL , are scrambling to defend their turf. 
    They are looking at ditching local agents in favor of 
setting up their own domestic operations to oversee warehousing 
assets directly, seven sources who work for warehousing 
companies or use them to store their metal said. 
    Detroit-based Metro International Trade Services, a major 
warehousing company that Goldman bought in 2010, is looking at 
setting up shop in Shanghai and other bonded locations in the 
country, a source familiar with the matter told Reuters. 
    "Western banks and other types of financiers want an 
alternative to what's already there," the source said.   
    A spokesman for Goldman declined to comment. The possible 
move comes at a critical time for the bank. It is looking to 
sell Metro amid pressure from U.S. regulators and lawmakers, who 
are concerned about Wall Street banks' involvement in the 
physical commodities market. 
    The investigation by police in the Chinese port city of 
Qingdao centers on a private metals trading firm, Decheng 
Mining, and its related companies that allegedly used fake 
warehouse receipts for about 340,000 tonnes of copper, aluminum 
and alumina, the key ingredient for making aluminum. 
 ID:nL2N0OT01V  
    Western banks including Standard Chartered, Citigroup Inc 
 C.N , Standard Bank Group  SBKJ.J , and merchants including 
Mercuria have disclosed exposure amounting to almost $1 billion. 
 ID:nL2N0PT281  
    Following the revelations, banks and traders with metal in 
Qingdao and elsewhere in China have raced to check the metal 
actually exists, move it into depots considered more secure and 
protect themselves from potential losses, sources said.     
    With banks facing hefty losses and financing terms in China 
tightening, it's not clear if these steps by the warehousing 
industry to repair the damage will be enough to restore 
confidence in the long term. 
    "This (scandal) is changing the nature of the warehousing 
business significantly. Using third parties is not a viable 
model anymore," said a source at a major merchant that has metal 
stored in China. 
    ((Click here for Qingdao port graphic: http://reut.rs/1l6YMLF)) 
     
     
    EXPANDING FOOTPRINT 
    Steinweg, a 167-year-old Rotterdam-based firm, is looking to 
expand its vast footprint in China by leasing more sheds in 
Qingdao, as well as Shanghai and other locations in China, two 
sources familiar with the move told Reuters. 
    Unlike some rivals, Steinweg carved out a niche in the 
burgeoning China market by operating and controlling its own 
depots, rather than using local agents, sources have said. 
    The company leases storage space, often located in 
free-trade-zones in ports, and has its own staff to monitor the 
stock itself. 
    More than 100,000 tonnes of copper has already flowed into 
its sheds from rivals' depots since the scandal broke, one of 
the sources said. That is equivalent to about one-fifth of all 
the copper stockpiles estimated to be held in bonded storage in 
Shanghai, and nearly as much as the London Metal Exchange's 
global inventories. 
    The company declined to comment on the expansion. It 
operates in 11 locations in China, according to its website. 
    Goldman's Metro unit would likely copy the Steinweg business 
model of running and controlling its own sheds if it decides to 
make a move into China, sources say. 
    For now, Steinweg's model appears to have paid off as 
skittish banks and merchants pressure warehouse operators to 
prove there is no chance of their stockpiles getting mixed up 
with other customers' metal. 
    Other warehouse companies are scrambling to catch up. They 
include CWT Commodities owned by CWT Ltd  CWTD.SI , Pacorini 
Metals, Impala, Henry Bath owned by JPMorgan Chase & Co  JPM.N , 
and GKE Corp  GKEC.SI , which is a unit of Louis Dreyfus Corp 
 LOUDR.UL . 
    Sources familiar with their plans said they were either 
stopping using local firms and hiring their own staff to run 
their sheds or were considering doing so.  
    JPMorgan is in the process of selling its physical 
commodities business, including the warehousing unit, to 
Mercuria. 
    The companies all declined to comment. 
 
 (Additional reporting by Polly Yam in Hong Kong, editing by 
Ross Colvin) 
 ((Josephine.Mason@thomsonreuters.com)(+1 646 223 8925)(Reuters 
Messaging: josephine.mason.reuters.com@reuters.net)) 
 
Keywords: CHINA WAREHOUSING/GOLDMAN