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Why Metals Keep Going Missing in Commodity Trading


A group of Chinese traders discovered in August that a copper merchant in northern China wasn’t holding the half a billion dollars’ worth of ore that was meant to be their collateral. This followed an episode in June involving missing aluminum. The incidents highlight rising risks in commodity financing as China’s growth model is tested. And they carry disturbing echoes of a much bigger scandal eight years ago -- the Qingdao fraud -- that triggered a sweeping overhaul of the commodities business at international banks and trading houses.

There are several ways things can go awry. Commodities trading, whether that’s wheat, copper or oil, is typically a high-volume, low-margin business. To fund purchases and optimize cash flow, traders take out loans backed by the commodity they’re trading. In the metals business, that collateral is often in the form of so-called warehouse warrants or receipts, which record details like the quantity, quality, ownership and location of the goods. The dependency on paper makes an easy target for fraud. Warrants can be faked, using fictitious material. A single pile of metal can be collateralized for multiple loans -- often known as over-pledging. Or, a stretched trader might simply sell on the goods to which the lenders have a claim, without paying back the loan. There’s a rich record of risk and fraud stretching back through the history of global commodities trading.