QINGDAO 1.0 The Qingdao scandal broke in mid-2014, when some aluminium supposedly held by Dezheng Resources in the port of Qingdao was found to be missing. The Chinese authorities immediately locked down Qingdao preventing legitimate metal owners from accessing their metal and independent assessment of the scale of the problem. The chairman of Dezheng Resources received a 23 year sentence after it emerged they had been multiple pledging and selling stock, with some estimates putting the loss at $3bn to banks and trading houses.


Qingdao spawned a number of lawsuits over metal collateral, memorably Mercuria vs Citigroup in London’s High Court, and other lawsuits involving metals financing emerged some years later including Marex-Natexis-Access World, and Envy Global Trading in Singapore this year.


TRANSIT FINANCE STILL A RISK? Given the relatively high costs to buy and ship metal, LME warehouses tend to be down the list for regular buyers of physical metal, with consumers preferring to source from merchants or producers.


Despite the higher costs of buying LME warrants, the market continues to see warrant trading enquiries from non-physical players in Asia, keen to pick up or dropping back LME deliverable metals, which suggests some regional banks are still offering preferential lending rates against warehouse receipts. Given the high round trip costs of rolling LME warrants, it’s reasonable to suspect these costs are diluted by multiple pledging, with the associated risks to lenders.


It’s not just Chinese banks which are exposed to risks when financing metals, with news reports that several western banks stopped commodity financing for a diverse steel group after it was alleged that liberties were taken with bills of loading and absent metal.


A central registry of collateral and regular auditing would have helped prevent multiple pledging and missing metal at Qingdao. In the aftermath, blockchain technology was suggested as a secure ledger for commodity financiers, although it’s uncertain if or how effectively this has been applied in China.


IT’S NOT IMPOSSIBLE THAT EVERGRANDE MAY HAVE SOME INVOLVEMENT IN METALS FINANCING?


DIRTY LAUNDRY Western financial markets were rightly embarrassed by the financial crisis of 2007-08, brought on by a creative pursuit of returns after US rates were cut close to zero following the equity weakness in early 2001 and aftermath of 9/11.


Generous QE and zero rates were (are still) employed to keep the system afloat, and Government enquiries led to crackdowns on bank compensation and behaviour, with financial dirty laundry getting a public washing.


Side-stepping the west’s financial issues, China’s economy has continued to develop strongly, including bouncing back from the COVID pandemic that continues to challenge the global economy, while also attracting regular expressions of concern about China’s shadow banking sector.


September’s failure by Evergrande to meet interest and principal payments provides a significant test for authorities. China’s second biggest property company has US$300bn debt at risk and off-balance sheet exposures including a domestic wealth management arm, triggering local protests and global concern at a time when China is also trying to address the wealth gap and excessive commodities speculation.


The Chinese government announced that Evergrande’s interest and principal payments were on hold, suggesting some form of state bailout but, with their US$ debt trading mid 20s% and forecast sub 20%, international debt holders will suffer.


As a construction company, it’s not impossible that Evergrande may have some involvement in metals financing? If so, there may be repercussions for the global metals market?


If safeguards surrounding collateralised lending have been introduced since Qingdao, this might allow a more orderly unwind of bank exposures. However, the ongoing appetite by financial players for LME warrants suggests risks remain.


When Qingdao broke in 2014, the Chinese locked it down rather than wash that laundry in public. It will be interesting to see how Evergrande’s treatment differs in 2021?


Rohan Ziegelaar E: metals.desk@admisi.com T: +44(0) 20 7716 8081


21 | ADMISI - The Ghost In The Machine | Q3 Edition 2021


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30