EDITOR: | June 6th, 2014 | 6 Comments

China metal financing deals reignite transparency issue

| June 06, 2014 | 6 Comments

Bubble-ChinaNearly two years I wrote up a Citigroup metals report concerning China. It included the following sentence quoting that report: “However, more metal may soon come on the market as banks clamp down on ‘multiple collateral raising’— that is, the widespread practice in China of producers using the same metal as collateral for several loans”.

That wasn’t even news to me. I had already written about this dodge before the Citi report surfaced. If I knew that there were suspicions that this “multiple collateral raising” was going on, so should the banks that were actually lending the cash.

So why the surprise this week? On Wednesday London’s The Financial Times headlined “Copper retreats on China financing fears”. The news was that shipments of copper and aluminium through the port of Qingdao had been halted after a trading company in the city was alleged to have used the same stocks of copper as collateral for multiple deals. The paper quote Macquarie Bank estimates that the company in question holds 20,000 tonnes of copper but had collateralised up to 50,000 tonnes. As much as 100,000 tonnes of aluminium may also be involved.

Let’s go back to that 2012 report and note the words “the widespread practice” of doing such deals. It was well known back then.

So it should have been of little shock effect when Reuters this week broke the news that Qingdao Port authorities were counting the industrial metals held in its bonded warehouses to determine if they matched the amount cited in documents pledged to banks as collateral for loans. It was reported that Standard Bank Group had begun investigations into what news reports called “potential irregularities”. The Johannesburg-based bank no doubt has done some business in these collateral loans. Meanwhile, the London-based Standard Chartered Bank is apparently reviewing its China financing business. The head of Macquarie Bank’s commodity research, Colin Hamilton, said the Qingdao probe would make China’s banks “extremely cautious” about financing such transactions (although this would not affect financing shipments to end-users).

But how about this line in The Financial Times this week explaining how the system works. “For banks, the loan is usually considered safe because the metal acts as collateral. But when the metal is pledged multiple times it makes the loan much riskier”. You think?

But there is also a wider issue here: one of general transparency. And that has implications for all the sectors covered here on Investor Intel. (And also underlines why our China correspondent, Hongpo Shen, is so valuable in reporting developments that are not easily discovered by outside observers.)

I have long viewed it as extraordinary that the world’s financial system relies so heavily on an economy (China) that is not open and transparent. Economic and business decisions are made not always with complete information.

For example, last year a senior official of the People’s Bank of China gave an interview in which he said the central bank had not added any of the yellow metal to its reserves since its April 2009 announcement that those reserves had increased to 1,054 tonnes. Yet it was reported just last week that Jeff Nichols of American Precious Metals Advisors said his sources told him the PBOC bought 654 tonnes of gold from 2009 to 2011, 388 tonnes in 2012, and more than 622 tonnes in 2013. If that is true, the bank’s holdings would have more than doubled since the 2009 announcement.

At the moment, we have investors fleeing the gold market, the metal sitting at $1,252/oz. Now, if Nichols is right and the PBOC holds 2,718 tonnes (probably more), then confirmation of that would send a shock wave through the gold sector. So you see what I mean? Here are investors making decisions about gold without being able to find out what the most active participant is doing.

We get glimpses of what is happening in the rare earths sector, can take some educated guessers on trends with technology metals such as antimony and tin, and hear from international agencies how many graphene patents have been filed by Chinese companies.

But is far from a full and open picture. And multiple collateralising is just a symptom.



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  • Tim Ainsworth

    Robin, the classic example has to be the officially manufactured RE supply “crisis” of 2010 with export quotas slashed 40% while, as we now know, production was circa 2x global demand.
    Now obvious endgame to a 5 year plan that went horribly wrong by not anticipating the potential for good old capitalist speculation.
    They are still trying to unwind the damage from that one, while at the same time taking increasing positions in ROW assets. With a population equivalent to the USA urbanising over the next 10/15 years what’s the new game plan?

    June 6, 2014 - 11:47 AM

  • vacuum

    1. China clamping down on multiple hypothecation is very different than clamping down on collateralized loans. With the latter you still need physical collateral. With the former there is much less physical collateral in existence than ever thought there was.

    2. Yogi Berra asks: How can more metal come on market if less metal was ever available to the market?! That’s like saying: “I’ll get you, you, you, not you because you’ve already had too much, you, you, you and you can share since you’re married, you, you, you, you, you, you, you, you, you, and finally you another beer.” But actually there is only a six-pack on ice.

    This kind of situation always leads to a brawl. But instead of relating this to the current warring in the Asian theater; or precisely to financial securities, we get the market’s initial knee-jerk reaction and the FinancialTimes headline–all sounds like the kind of bear trap that usually proceeds huge rallies in gold and silver.

    June 7, 2014 - 6:21 AM

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  • vacuum

    Now zerohedge is talking about this. Of gold and silver, they hypothesize that a lifting of hedges associated with them might actually cause these two to rise spectacularly. Previously they had shown apparently that all the physical buying that was otherwise happening was oddly putting a wet blanket on these prices. (This ‘convolution’ all having to do with the complex nature of the financing structure, etc)

    June 9, 2014 - 4:28 PM

  • vacuum

    ? should we not wonder if REEs were entangled in this financial web of rehypothecation, collateral. Just a thought. Jack might know, though he tends to focus upon the particulars of the science/processing&manufacturing rather than the extra-financial dimension of commodities.

    June 9, 2014 - 4:31 PM

  • vacuum

    on June 7th vacuum wrote (^above):

    “This kind of situation always leads to a brawl. But instead of relating this to the current warring in the Asian theater; or precisely to financial securities, we get the market’s initial knee-jerk reaction and the FinancialTimes headline–all sounds like the kind of bear trap that usually proceeds huge rallies in gold and silver.”

    zerohedge confirmed today: ‘Gold Hits $1300, Silver Surges To 3-Month Highs As China Rehypothecation Ponzi Unwinds’ c. 06/19/2014 11:47 -0400

    June 19, 2014 - 1:37 PM

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