COLUMN-China metals probe likely a short-term problem – by Clyde Russell (Reuters U.S. – June 23, 2014)

LAUNCESTON, Australia, June 23 (Reuters) – The brouhaha over suspected metal financing fraud at China’s Qingdao port is likely to cause short-term angst, but longer-term gains.

Banks and authorities are now probing allegations of whether a private Chinese metals trading firm was duplicating warehouse certificates in order to use a cargo several times to raise financing.

The immediate impact is likely to be a sharp tightening of lending practices to China-based metals traders, thereby limiting their ability to participate in the market.

Longer-term, it’s likely that China’s massive warehousing sector will come under further scrutiny and may eventually be forced to adopt tighter rules, such as those at facilities regulated by the London Metal Exchange (LME).

While the issue has so far been limited to Qingdao port and to deals involving copper and aluminium, there are concerns the issue may be more widespread and linked to more commodities, such as iron ore and soybeans. While the potential ramifications from the Qingdao warehousing issues are significant, the impact on market pricing hasn’t been so clear as yet.

Benchmark spot iron ore .IO62-CNI=SI dropped in the days after the Qingdao news first surfaced, hitting a 21-month low of $89 a tonne on June 16. It has since recovered slightly to close at $92.10 on June 20.

Iron ore has been on a weakening trend since December amid rising supply from global miners and concern over the pace of economic growth in China, which buys about two-thirds of seaborne cargoes.

Chinese traders are already being starved of credit as banks increase the scrutiny of financing deals linked to iron ore imports.

This may result in short-term selling of distressed inventory as smaller trading companies scramble for cash to pay off loans.

With Chinese port inventories at a record 113.4 million tonnes on June 20, up 0.8 percent from a week earlier, the likelihood of downward pressure on iron ore prices increases.

But it’s not necessarily a one-way street for iron ore prices, as inventories of the raw material at steel mills are believed to be low, meaning they will be tempted to snap up supplies, especially given recent price weakness.

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