Traders at risk from bank credit clampdown

A warehouse fraud in Qingdao's port has forced banks and trading houses to consider new controls in the mainland's massive commodity financing business, which traders say could lead to drying up of credit for all but large firms and state-owned companies.

Commodities trading is dominated by the large and state-owned companies but there are thousands of small firms in the market. Faced with tougher bank requirements for financing, they could sell down stockpiles, squeezing demand for metals and other raw materials.

Any new requirements would also increase the risk that customers who do not regain credit lines may default on payments for services such as hedging, or for imports.

"The fear is not so much about the big boys, but some of the other smaller, newer players, who may have only been in this commodity financing game for the last two to three years," said Jeremy Goldwyn, a director with commodities broker Sucden. "If all of a sudden the tap is turned off to them, they might have more of a crisis."

According to sources, Standard Chartered Bank has suspended some commodity financing deals in Qingdao port after authorities there launched a probe into a private trading firm, Decheng Mining, that is suspected of duplicating warehouse certificates to use a metal cargo multiple times to raise financing.

For Western banks such as Standard Chartered, HSBC and BNP Paribas, which are restricted in the domestic loan market, the metals financing business is a lucrative alternative but the Qingdao scandal has renewed focus on counterparty risk.