The port city in northeastern China is famous for its Tsingtao brewery that was founded more than a century ago with 400,000 Mexican silver dollars as capital. But in recent years, Qingdao – the beer’s name is an older spelling – has been attracting other types of metal. As Chinese traders’ appetite for cheap forex funding has increased, piles of copper and aluminium used as loan collateral have accumulated in dockside warehouses.

But at the end of May, Qingdao’s metal stacks started to wobble. Local authorities began investigating whether a Chinese company had pledged the same lots of material to several banks – the equivalent of a homeowner taking out multiple mortgages on a house while telling each lender they were the only one. With potential losses running into hundreds of millions of dollars, banks and traders scrambled to assess their positions. Standard Bank and Standard Chartered Bank said they were investigating their exposure, while China’s CITIC Resources, asked courts in Qingdao to secure its metal held at Qingdao Port.

“Everybody has been going through their receipts with magnifying glasses and heading to warehouses to look for their metal,” says Vivienne Lloyd, an analyst at Macquarie.

The ripples quickly spread far beyond Qingdao. The London Metal Exchange price of three-month copper, already down 5 per cent for the year, has dropped 4 per cent since the start of last week, to $6,650 a tonne on Thursday. New financing deals for copper and other metals in China have dried up.

Commodity traders, banks, financiers and analysts were left pondering a number of questions. Was this alleged financial fraud an isolated case or are other Chinese companies and ports also involved? Will the market be flooded with copper exiting warehouses, putting further pressure on prices? And what might the long-term effect be for Chinese metals financing deals, an important part of the shadow banking sector in the country?

Two weeks on, and the investigation at Qingdao still appears to centre on a single group of companies owned by Dezheng Resources, which operates aluminium smelters, power plants and coal mines. Dezheng is reported to own up to 20,000 tonnes of copper and 100,000 tonnes of alumina at Dagang, an older docking area within Qingdao Port.

“The market is still uncertain [about the Qingdao implications],” David Lilley, co-founder of Red Kite, a metals-focused hedge fund and trader, said at a derivatives conference in London this week. “I am somewhat reassured by the fact that . . . no other area, no other problem has been uncovered.”

Qingdao has not traditionally been a hub for metals financing, but stocks built up rapidly this year. By the end of May, nearly 100,000 tonnes of copper – about 60 per cent of the copper inventories in London Metal Exchange sheds globally – was stockpiled in Qingdao, according to Macquarie. Even so, stocks elsewhere in China are much higher, with bonded warehouse districts in Shanghai holding around 800,000 tonnes of copper. Traders say that facilities at Shanghai and at other Chinese ports are organised and operated to global standards, often by international logistics companies.

For this reason, Macquarie says it “doubts that many more, if any, scandals will be uncovered”. Bank of America Merrill Lynch was less sure, noting that issuing multiple warehouse receipts for the same tonne of metal was a known issue in China, though it concluded that “copper’s Waterloo is not in Qingdao”. Meanwhile, Doug King, chief investment officer of RCMA Capital, which runs a commodity fund, said this week that he expected the Chinese financing probe to be extended to iron ore and soyabeans.

Fund managers and analysts agree that the Qingdao investigation will have an effect on commodity financing deals in the short term. Goldman Sachs said it expected foreign banks to continue scaling back its collateralised lending businesses in China. As a result, less metals will flow into bonded warehouses, and some of the stocks already there will be shifted.

Macquarie estimates that, due to the lending squeeze, around 290,000 tonnes of copper in Chinese bonded warehouses will be moved, mostly to LME warehouses, either on or off-exchange. But it expects a floor of about 600,000 tonnes of copper to remain in bonded facilities, as part of the established metal-financing transit trade run that is run by large importers and eventually feeds local factories.

“These schemes have been an integral part of the Chinese copper market for some time,” says Nic Brown, head of commodities research at Natixis. “As long as there’s no more double pledging of collateral, financing should continue in the future.”

Dezheng could not be reached for comment.

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