Cross posted from Investing in Chinese Stocks
Following from yesterday, unless some of the ports run an extremely tight ship, I’d guess that this problem could be everywhere there is copper stored in China. I’m honestly a bit surprised that many foreign banks were still making loans based on copper collateral given that this scam has been well known for years.
The steel traders already went bust and their cases are clogging up the courts in Pudong, Shanghai. Losses aren’t final yet due to the ongoing lawsuits, but the sums involved reach into the billions of dollars. This article from early 2013 (when the steel traders were already bust) estimated the copper financing trade might be ￥50 to ￥100 billion, and bad debt might be ￥5 to ￥30 billion.
ZeroHedge has a Goldman estimate as high as 10 to 30 times the physical copper involved. The Chinese article quoted GF Securities at ￥70 billion for the whole market and ￥100 billion including rehypothecated collateral. So estimates of several billion dollars in bad debt may be a quite conservative estimate.
No doubt in the end, we’ll be able to cut and paste steel with copper: Steel Trade Lawsuits Explode; Banks’ Unceasing Nightmare; Defendants Flee.
Citic Seeks to Secure Metal in Chinese Port of Qingdao
Separately, Western banks worry that the potential fraud has flared up at a second Chinese port, Penglai, also located in Shandong province, according to people familiar with the matter.
Banks and trading houses are looking into suspected fraud involving metals stored in China that were used as collateral for loans, according to people with knowledge of the matter. At least a half-dozen lenders, including Standard Chartered STAN.LN -0.86% PLC, provided loans to trading firms that were backed by metals such as copper and aluminum stored at Qingdao, one of China’s biggest ports, the people said.
……A number of Western and Chinese banks have sought similar court orders in an effort to secure their collateral, according to one person familiar with the matter. But the court orders won’t alleviate the problem of multiple lenders claiming the same piece of collateral that had been promised to them by the borrower, this person said.
Western lenders are also concerned that the potential fraud may also have occurred at Penglai port, located about 150 miles south of Qingdao, according to people familiar with the matter. Inspectors have been unable to again access to collateral stored at Penglai port, one of the people said.
One executive at a Western bank said the development is a worrying signal that the possible fraud first uncovered at Qingdao may be more widespread than anticipated.
The Western lenders involved include Citigroup Inc., C +1.33% Standard Chartered PLC, Standard Bank PLC, ABN Amro Bank NV, BNP Paribas SA and Natixis.
Copper was up slightly on the LME last night, but still looks very weak technically:
