HSBC boosts oversight on metals financing in wake of Qingdao probe

Lenders monitoring fallout from Qingdao Port scandal, which has already hit copper prices, with signs it may be spreading to other metals

PUBLISHED : Monday, 16 June, 2014, 3:07am
UPDATED : Monday, 16 June, 2014, 3:40am

HSBC, the city's largest bank, which has been aggressively expanding on the mainland, is carefully examining all commodities financing transactions following reports of alleged irregularities at Qingdao Port.

"We continue to provide commodities financing support to our customers," an HSBC spokeswoman told the South China Morning Post.

"Recognising the uncertainty of the situation in Qingdao, we are thoroughly assessing each transaction on its own merit."

HSBC is the latest bank to join lenders such as Standard Chartered and Citi to monitor the fallout of the Qingdao scandal.

Mainland officials are investigating if a company used the same cargo receipts of metals stored at Qingdao Port warehouses multiple times to secure more commodities finance from banks.

Commodities financing has emerged as a source of hot money influx into the country, with some companies using receipts of their metals stockpiled at warehouses of mainland ports as collateral to secure bank loans that are then invested elsewhere.

According to a Goldman Sachs report in March, the amount of transactions using commodities as collateral is about US$160 billion, or 31 per cent of the mainland's total short-term foreign exchange loans.

Gary Cheung Wai-kwok, the chief executive of Tung Shing Futures (Brokers), said the scandal would affect banks' metal financing business on the mainland.

"The Qingdao case shows banks need to tighten their procedures to check collateral to prevent fraud," Cheung said.

Lenders other than HSBC have been monitoring the situation just as closely.

Arun Murthy, the global head of commodities at Standard Chartered Bank, said: "We are not pulling out of our commodity financing business in China."

He added that the bank was watching the situation.

"Standard Chartered's commodity financing business is a key focus area for the bank and we remain committed to supporting our clients," Murthy said.

A spokesman at Citi said: "We are aware of reports of issues at Qingdao Port. To the extent Citi's clients are affected, Citi will work closely with the relevant authorities, warehousing companies and clients to resolve the matter."

The Qingdao scandal has already hit copper prices, with signs that it may be spreading to other metals.

Iron ore fell to the lowest since 2012 on concern that the probe into commodity financing at Qingdao Port may hurt demand for the raw material amid a global glut.

Ore with 62 per cent iron content delivered to the port of Tianjin declined 0.7 per cent to US$90.90 a dry tonne on Friday, the lowest level since September 2012, according to the Steel Index published by Platts.

Prices lost 3.8 per cent last week and retreated in eight of the past nine weeks.

Additional reporting by Bloomberg