Novotel Singapore Clarke Quay
Among the many banks launching legal action, following the Qingdao case in China, is HSBC. The bank is starting a probe into Decheng Mining, the firm caught in the eye of the allegations, to find whether it used fake warehouse receipts to obtain multiple loans.
An estimated $900 million exposure involves banks and trading houses in this suspected metal financing fraud in China. It is expected that the legal battle will be dragged over years and there are fears that it will hinder the recovery in metal trade.
Those in the commodity financing business will have to introduce newer and better controls on lending requirements to ensure their future is not effected.
The scandal is also expected to negatively impact the commodity financing market and it is said that there might be reduced lending on metal collateral in the next six to twelve months.
It's reported that China's imports of refined copper, which is most widely used metal in financing, fell 8 percent in June from a year earlier to hit a 13-month low as banks reduced lending for metals imports following the probe.
Further the lawsuits will drag for years as there are multiple claimants over cross-country jurisdictions. Plus it also involves state-owned entities and a separate corruption probe on Chen Jihong, the chairman of Decheng's parent firm.
As China recognizes international arbitration awards, a recoup of losses with the help of arbitration is possible. But that too takes at least two to three years.
It's still unclear how the full financial impact of the Qingdao case will impact the commodity financing market. But publicly traded banks and trading firms have been forced to disclose potential losses. Some of these such as HSBC, Standard Chartered, Citi, Standard Bank , Mercuria Energy Trading and Citic Resources have more than $880 million of exposure.
More on impact of the Qingdao case and the risks of commodity financing will be discussed at the Warehouse, Cargo & Structured Commodity Finance summit on 12-13 November, 2014 in Singapore.
Contact Ms. Grace at email@example.com or call +65 6346 9147.
There is heightened competition in Singapore's commodity trade finance sector, given a continuous growth in commodity trade flows into Asia along with banking regulations. All of this is boosting the increased use of structured inventory financing in the region that is further driving the traditional commodity financiers to make a comeback even as newer Asian entrants make headway.
Commodity finance has been largely dominated by large European commercial banks in the past. However, post European sovereign debt crisis in 2011, which led many European banks to rein in their lending, new entrants such as DBS Group and more recently, China's ICBC, Bank of China and China Construction Bank have forayed into the commodity trade financing business.
Meanwhile European banks are also making a comeback and trying to capture the future growth in Asia. For instance, ABN Amro and Rabobank have already commenced their dedicated structured inventory financing desks in Singapore in the second half of 2013.
Stuart Smith, Deutsche Bank's head of commodities in Asia "estimates that the inventory market is growing at between 5-10 per cent a year, and that there is US$15-20 billion of such financing at any one time."
Commodity inventory financing includes traders who pledge a warehouse receipt for a secured loan as well as repurchasing transaction where the 'bank takes over the ownership of commodities for a short period of time'.
The latter - the 'ownership model' has become very popular because of the benefits it presents to both the client and the bank. This model increases bank's security as well as requires allocation of less capital under regulatory requirements and allows optimization of capital allocation while offering alternative financing. Further, ownership of goods also helps banks to stay clear of legal complications. The new ABN Amro desk adopts this ownership model by using a special purpose vehicle.
From a commodity trader's vantage point, the ownership model ensures just-in-time delivery, better management of balance sheet and access to more liquidity.
Further, it also helps to reduce the cost of the loan by between 10-50%. This is particularly true for smaller trading firms that have lower credit rating with banks. However, in recent years there have been a number of problems with frauds using warehouse receipts and inventory finance, and most recently the Qingdao scandal, indicates losses of hundreds of millions of dollars, affecting a number of large international banks and also a major international trading house.
More on the usefulness of the structures and the potential for fraud and how to mitigate risks, as well as wider commodity finance themes will be discussed at Warehouse, Cargo & Structured Commodity Finance conference opening on 12-13 November, 2014 in Singapore.
Contact Ms. Grace at firstname.lastname@example.org or call + 65 6346 9147 for more details.