HONG KONG—Metals used to back financing deals in China are finding new homes across Southeast Asia following a scandal last year at one of the country’s main commodity warehouses.
So-called metals-backed financing was mired in controversy last summer when it was found that the same metal stored at a warehouse in Qingdao was being pledged as collateral to multiple lenders to raise money. That led to suspicions the malaise ran deep across China.
Market participants say the metals-backed financing trade is continuing, but the underlying metal pledged for loans is increasingly located in warehouses in countries such as Malaysia, where it is easier for banks to monitor. Some, though not all, are official London Metal Exchange warehouses. The proximity of Malaysia to Singapore, where a number of banks are located, has buttressed these moves.
“The trend has accelerated over the past 10 months,” said Ivan Szpakowski, Hong Kong-based metals analyst with Citigroup.
While it is difficult to get figures for how much metal is used in financing, analysts say the shift in mechanics of such deals is one reason China has been importing less of some metals in recent months. For example, imports of refined copper, one of the metals used most often in financing deals, have dropped 14% year-to-date.
Meanwhile, a warehouse such as the one run by Pacorini Metals Asia Pte in Johor, Malaysia, has seen the amount of metal it stores rise by 50% in the past year to 317,935 tons at the end of April, according to LME data. That currently makes it one of the exchange’s largest warehouses globally in terms of metal stored. Nearly 80% of the London Metal Exchange’s nickel inventories in Asia are now being stored in Malaysian warehouses.
Metals-backed financing trades became popular in China in recent years, alongside a boom in the quantity of commodities the country has been importing to support its growing economy.
In one form of the deal, a trader importing metals might obtain a letter of credit, often from a bank overseas, with the bank involved then paying the metal exporter for the shipment.
Having taken delivery of the metal, the importing trader could then sell it on to an end-consumer before having to repay the bank that had issued the letter of credit. The trader could use the funds from the sale to gain a higher return by buying investment products or plowing it back into buying more metals.