2014-06-10

China Copper Scandal May Have Spread to Penglai; Bad Debt Could Reach Billions of Dollars

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.

Here's the Chinese article on copper financing mentioned above: 千亿铜贸资金断链危机
Copper prices continued to fall risk surfaced copper trade

Copper is used extensively for hidden inventory financing without entering entity.

By the world's largest copper consumer China economic data poor demand outlook worries intensified, leading to Tuesday's London Metal Exchange (LME) three-month copper prices fell to close to $ 6,870 per ton ton.

Since February 4, 2013 hit a recent high of $ 8346, copper prices on the way down, April 23 fell to $ 6,762 for 18-month low. Affected copper from February 4th highest fell to 60,510 yuan per ton, 48460 yuan per ton on April 23, the lowest level in nearly three years.

The recent fall in copper prices, the market worried about money traders are doing a fracture of copper chain financing risks. Previously steel trading business risks facing funding strand breaks has caused great concern in the market, the next crisis could erupt in the copper trade fields.

Copper traders trade is talk to the bank to deliver 20% of the total imports of electrolytic copper deposit, you can open a letter of credit for 90 days or 180 days. Copper spot again after a month to get a quick sale, equivalent to 60 days or have a short-term financing for 150 days. When credit is about to expire and can make a new deal, shattering, and even have the funds to invest in other areas of financial profit.

Under normal circumstances, the copper trade enterprises face the need to pay the bank 20% -30% margin; while in copper prices, the bank will increase the margin ratio, or shorten the repayment period. Makes some trade enterprises increased financing costs, capital chain risk increases, the risk of rupture once easy to transfer to the bank. It is estimated that Chinese copper trade financing high-risk level of the scale of 50 billion yuan -1000, once the capital chain scission risk, banks may produce 5 billion -300 billion in bad loans.

100 Billion copper trade capital chain rupture or repeat the steel trade crisis

Financing is not really the main copper smelters or processors.

Prior to the steel trade risk capital chain has attracted extensive attention. Steel trade financing Piandai is repeated pledges by the steel trade enterprises to obtain bank loans due to falling steel prices eventually makes steel trading business funding strand breaks, bank check inventory and exposure.

The copper price is much higher than steel, and its repeated pledge to achieve a similar way to the steel, plus the convenience of a credit institution, mortgage repeat feasibility theoretically higher copper steel. Coupled with the tightening steel trade financing, with a number of private capital financing needs by turning copper is a high probability event. Copper trade is likely to repeat the mistakes of the steel trade.

In fact, behind the rise is a combination of copper and trade mortgage and credit, and the real risk lies in the copper repeat mortgage financing. Regulatory warehousing and traders collusion caused relaxation makes it possible to repeat the pledge, and then leverage this operation greatly reduces the cost of financing traders, but also exacerbated the credit risk.

If traders do not choose to sell the imported copper mortgaged to the bank, you can not impact on the price of copper on the basis of cash, this is combined with the credit institutions and mortgage financing. Through this combination, traders will get a lower cost leveraged loans, the annual interest rate is generally 5% -10%. In annualized interest rate of private lending up to 20% -25% of the situation, a very large copper attractive financing, which is the reason for the rise in recent years, copper financing.

GF Securities estimates that China's copper trade finance high-risk scale 50 billion level. The SW believes that if you do not consider the factors corresponding to repeat mortgage financing scale copper trade at 700 billion yuan, if we consider the possibility of repeat mortgage, this scale will be more than billion.

With the tightening of liquidity continues to be, part of the purpose of the copper traders imported largely from the physical demand and trade, evolved into the use of trade in the form of access to credit by bankers' acceptances, obtain funds for his purposes, and even get involved private lending high-risk areas.

But because only in the copper market traders actual copper inventory hedging, so when the price of copper fell more number of banks to raise collateral requirements due to high leverage and doubled it, traders are very likely to break the chain of funds.

Non-performing loans of billions of bad debt or copper trade leads trillion bank

Copper trade chain risk is the accumulation of capital

The report shows that, overall upward trend in non-performing assets of the banking sector significantly, resulting in significantly increased supervision; while in the liquidity and fundamentals have not reversed the situation, copper prices continuing to fall will be a high probability event, the probability of exposure is also copper financing increase.

GF Securities believes that assuming a 10% failure rate, the entire commercial banking system may be formed 5 billion of bad loans. Under the pessimistic scenario, 30% of non-performing rate will correspond to 15 billion non-performing loans. The SW believes that the cumulative effect of years of very large copper financing and mortgages will increase repeat makes this increased risk, the commercial banking system may be formed 100-300 million of non-performing loans.

Even though 30 billion of non-performing loans affect the overall asset quality of the banking sector is not too large, but thousands of miles of dike destroyed nest, steel trade, copper trade and other known and unknown risks revealed one by one, facing the banking industry difficulties and risks will also increase.

GF Securities through trade finance, financing platform, SME loans, real estate loans in the banking system of some sort of high-risk areas and stress tests are expected in the current round of economic adjustment process, the domestic banking system's NPL ratio of potential under neutral conditions will rise to 3.7%, the formation of non-performing loans of 2.3 trillion yuan, while non-performing loans in the pessimistic scenario is likely to exceed 4 trillion.

Of course, banks may report data does not appear sharp deterioration in risk, but the risk will always continue to accumulate in the blind optimism, will focus on the outbreak situation worse time. Especially in the context of economic slowdown, the Chinese banking system may exist massive potential bad debts. The copper trade, may become the straw that breaks the camel.
Epilogue
In the situation of falling copper prices, copper trade risk is gradually revealed, if not more stringent regulation, such as the risk of a real outbreak of time, will copper prices, copper trading business in particular, have an enormous impact on the banking sector.

1 comment:

  1. One of the many sources of ridiculous leverage that was probably directly piled into real estate.

    - Luke

    ReplyDelete