AUDIT OF INE STOCKS AND BANK FINANCE TO AVOID REPEAT OF QINGDAO ISSUES.
BONDED COPPER AND “TRANSIT FINANCING” In addition to feeding the domestic market, Chinese bonded metal storage grabbed attention following the “transit finance scheme”, which took off after Chinese authorities restricted loans to their booming construction sector in 2010 (see my previous The Ghost in the Machine article “Slow Boat to China” from the November/December 2018 publication).
Simplifying the scheme:
1. A Chinese trader would buy LME copper warrants, show the LME “warehouse receipt” to a domestic Chinese bank, and receive transit finance covering delivery time to bonded Chinese storage at a “secured lending rate” of say 3%, compared to unsecured domestic funding at perhaps 10%.
2. After funds were received perhaps 2 weeks later, the trader could re-warrant metal back to the LME warehouse, pick up more metal and repeat.
3. The round trip “LME cost” over 2 weeks might be $15-$20/Mt (finance, rent, spreads, commission, re-warrant fee less contango), with costs diluted each time the same warehouse receipt was pledged.
4. In return, the trader might save 7% p.a. over 9 months and the un-witting lender(s) satisfied provided the loan was re-paid, even if out of new funds?
Weak controls at domestic banks meant they would not retain the documentation after funds were released, some banks lent on copied or faxed documents, and there was no audit of loans against physical metal, leading to stories of metal pledged multiple times.
Chinese authorities clamped down on “copper transit financing” in mid-2013, but the business quickly switched to LME nickel and tin warrants.
The Qingdao bonded warehouse scandal in 2014 saw financed metal disappear, and the authorities locked down access to warehouses amid speculation that the problem was widespread.
With some LME members caught out by faulty nickel warehouse receipts as recently as 2017, many in the LME market have pushed back on providing warrants to Chinese financial customers.
Despite the risks of “secured lending” without security, there is still demand for LME warehouse receipts, suggesting this finance is still on offer? Will this move to INE stocks?
The INE has already approved 5 warehouses with a total of 175kmt storage. A register of metal held and pledged against local bank finance could help avoid earlier problems regarding multiple pledges and metal missing from bonded warehouses?
18 | ADMISI - The Ghost In The Machine | Q4 Edition
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