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Qingdao metals fraud: individual case not to trigger systematic risk

2014-06-16 GMT+8:00

NANCHANG, June 12 (Xinhua) – East China'sQingdaoport administrative authority has recently started investigating whether trading companies used warehouse receipts to raise multiple loans on the same metal. 

In fear of bonded warehouse zones colossal metal stocks, locked up as collateral in financing deals, will likely flood back onto the market to cause temporary oversupply and break current fragile balance price, domestic copper prices have undergone sharp declines recently. 

In response to the probe inQingdaoport, Wu Yuneng, vice general manager ofChina's leading copper producer Jiangxi Copper Group, said that those fears are overblown. The loan fraud by warehouse receipts is just an individual case and will not cause systematic risk.

From the perspective of the history of copper price movement, the plunge in copper prices is associated with systematic risk in macro economy and the rapid deterioration in supply-demand fundamentals. But the case inQingdaoobviously does not meet the above two factors. Therefore, it will have limited effects on the copper prices.

In recent years,Qingdaoport has seen a boost in import trade of commodities; especially iron ore, copper and bauxite. Foreign banks such as Standard Chartered and Citigroup are also involved in the financing business that traders use metals as collateral for credit.

Wu said that the loan fraud case inQingdaoport occurred in a specified place and time and can not be copied. It will make domestic banks reduce the letter of credit business on nonferrous metals and foreign banks cut the business of warehouse receipt pledge repo operation in the short term. But the case will neither affect production and consumption of nonferrous metals nor change the supply-demand relations in the nonferrous metals market.

Meanwhile, some industry insiders also said that copper stocks in bonded zones are not "barrier lakes" and are expected to be consumed at home in the second half of this year.

Before the case inQingdaoport, some expressed their concerns about the increasing stocks inShanghai,Qingdaoand other bonded zones and believed that once the "barrier lakes" were released, the market would be hit hard.

Wu said that the view can not hold water. In the first quarter of last year, due to the slack season for copper consumption, stocks in theShanghaibonded zone once reached about 900,000 metric tons (tonnes), while stocks in the London Metal Exchange (LME) exceeded 300,000 tonnes. In the period, the global copper stocks amounted to 1.5 million tonnes. However, entering the second and third quarter, stocks in theShanghaibonded zone started falling, while the LME stocks also started declining rapidly after increasing to 680,000 tonnes in June. By the end of last year, the global stocks fell to a level below 800,000 tonnes.

Entering the second quarter of this year, the LME stocks started declining sharply. Therefore, the bill of lading copper metals arriving at the country's ports are expected to tumble in the second and third quarter, Wu added.

After one-week probe by relevant departments, no new loan fraud by metals has been found. On Wednesday, the LME copper rebounded after hitting a one-month low in the previous trading day.

TheShanghaibenchmark copper contract for August delivery closed 0.72 percent higher at 47,860 yuan/metric ton (tonne) on Wednesday. (Edited by Hu Pingchao,