Commodity Traders Keep Missing Metals

Trafigura Group faces more than $500 million in damages after discovering that nickel was missing from cargoes it purchased, sending fresh shockwaves across a sector that has been rocked by many high-profile scams in recent years. In August, a group of Chinese merchants discovered that a copper trader in their country was not holding about $500 million worth of ore as security. And there was an incident with lost metal in June. All of them underscore increased dangers in commodity financing and harken back to a far larger incident in 2014, the Qingdao scam, which prompted a comprehensive reorganization of the commodities industry at multinational banks and trading firms.

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1. How could a stockpile go missing?

There are several ways for things to go bad in the history of commodities dealing, which has a long tradition of risk and deception. The sector's reliance on documentation to support the transportation and storage of expensive commodities makes it an accessible target for fraud. Commodity trading is often a high-volume, low-margin enterprise, and merchants get loans secured by the goods they trade to maximize cash flow. In the case of metals, this collateral is frequently supported by paper records, such as warehouse receipts and shipment documentation including information about the quantity, quality, owner, and location of the items. The issue is that they might be forged using fictitious materials, or a single cargo can be pledged as security for many loans – a practice often known as over-pledging. In other instances, a cash-strapped merchant may simply resell the products on which the lender has a claim, without repaying the loan.

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2. What happened with the nickel? 

Due to its high value, nickel is a favored metal for swindlers, with a single container possibly worth $500,000. Trafigura had been purchasing metal in containers already on board ships, then reselling it when the ships arrived at their destination. In December, however, authorities at Rotterdam discovered that the shipment contained significantly less valuable components. The discovery resulted in a $577 million loss for Trafigura because of the containers.

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3. What about the copper incident? 

This lawsuit involves a small business known as Huludao Risun Trading Co. Before transporting it to Chinese smelters, the company purchases copper concentrate from overseas sources and stockpiles it at a port. Last year, the company received loans from a consortium of more than a dozen enterprises, the majority of which were state-owned, with 300,000 tons of Risun's stored copper concentrate as collateral. The bankers discovered that Risun was experiencing financial difficulties, and when they went to inspect their collateral on-site, they discovered just 100,000 tons – a third of the quantity that had been promised. The remainder of the material had already been transported, in violation of the lenders' claim on its material.

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4. And the other cases? 

Several Chinese merchants said they were deceived into extending up to 500 million yuan ($74 million) in credit against phony amounts of aluminum. Multiple warehouses temporarily ceased operations out of concern that warrants had been tampered with. Trafigura and commodities giant Glencore Plc were among those who hastened to examine their exposure, and at least one creditor filed a lawsuit against the warehouse managers for compensation. This year, two executives of a British steel-trading company were convicted of fraud in a $500 million trade-finance fraud conspiracy, and in 2020, Mercuria Energy Group Ltd. purchased copper from a Turkish supplier but discovered containers of painted pebbles.

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5. What’s driving this?

Over the past year or two, as credit flows have weakened in China, financing circumstances for traders operating on razor-thin margins have become increasingly difficult. As a result of the property downturn and the large fluctuations in commodity prices caused by the conflict in Ukraine, banks are increasingly hesitant to lend. Uncertainty was exacerbated by high-profile losses in the nickel market. This has prompted a shift towards alternate, less strictly controlled financing, such as deals in which smaller private enterprises guarantee commodities to major state-owned dealers in exchange for cash.

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6. What brings such cases to light? 

After reaching record highs in March, industrial metals plummeted in the second half of 2022 due to global economic uncertainties. Some market participants may incur substantial losses due to such volatility. After abandoning its Covid Zero strategy, China's economy, the world's largest consumer of metals, has struggled with a protracted property crisis and instability. As a result, creditors have grown more cognizant of the dangers associated with loans to commodity traders, who, during economic downturns, would have a diminished cash flow and may be susceptible to losses.

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7. What are the potential consequences and answers? 

In the worst-case scenario, vital commodities supply networks might experience a crisis of confidence. Banks and bigger traders will not lend to smaller companies if they lack confidence that the loans will be guaranteed by proper transportation and storage documentation. More instances of missing metal might precipitate more severe liquidity shortages that halt metals trading or generate significant concern among major dealers. Digitalization of the sector might be one option since it promises to minimize risks, lower costs, and save time. However, no globally approved standard exists that might replace the present paper-based approach.

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8. What happened in the Qingdao scandal? 

In the Chinese city of Qingdao back in 2014, banks, including foreign institutions, had the greatest exposure to a merchant trading corporation and its affiliates that had repeatedly guaranteed the same metals stockpile to secure loans of more than 20 billion yuan. Consequently, banks were more prudent. The usage of metals as collateral for financing has decreased since China's regulator asked businesses to enhance control and urged them to do so. Outside of China, French and Australian banks suffered credit losses in excess of $300 million in 2017 as a result of the discovery of counterfeit paperwork for nickel kept in Asian warehouses belonging to Access World, a subsidiary of Glencore. In 2020, Singaporean oil trader Hin Leong (Pte) Ltd. falsified paperwork in order to get trade finance for items it had previously sold. A few years back, Russia's Sberbank PJSC allegedly discovered that nickel containers it financed at Rotterdam on behalf of Sanjeev Gupta's Liberty Commodities had already been unloaded.