Why Metals Keep Going Missing in Commodity Trading

A succession of scandals has shaken metals markets and reawakened concerns about the fragility of warehousing and shipping networks that play a critical role in the industrial economy. The latest incidents ensnared some of the world’s most prestigious trading houses and revealed shortcomings in the oversight of warehouses connected to the London Metal Exchange — the world’s benchmark futures market for base metals.

Risk and fraud stretch back through the history of commodities trading and there are several ways things can go wrong. The sector’s reliance on paperwork to back the shipment and storage of expensive cargoes makes it an easy target for wrongdoing. Dealing commodities is typically a high-volume, low-margin business and merchants take out loans backed by the product they’re trading to fund purchases and optimize cash flow. In metals, that collateral is often underpinned by paper records — warehouse receipts and shipping documents recording details like quantity, quality, ownership and location of the goods. These can be faked, using fictitious material, or a single cargo can be collateralized for multiple loans — often known as over-pledging. In other cases, a stretched trader might sell on the goods to which the lenders have a claim, without paying back the loan. Sometimes, metal is simply stolen from warehouses by criminal gangs in sophisticated heists — but it’s the threat of fraud perpetrated by industry insiders that tends to cause most concern.