China Scrambling After "Discovering" Thousands Of Tons Of Rehypothecated Copper, Aluminum Missing

Tyler Durden's picture




 

"Banks are worried about their exposure," warns one warehousing source, "there is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists."

The rehypothecated catastrophe that we discussed in great detail here (copper financing), here (all commodities), and here (global contagion) appears to be gathering speed as the China's northeastern port of Qingdao has halted shipments of aluminum and copper due to an investigation by authorities after they found "there is a discrepancy in metal that should be there and metal that is actually there."

 

Copper prices are tumbling already (despite Gartman's most recent prognostication on Dr. Copper's China recovery meme) as the world's 7th largest port disallows any shipments until the probe is complete.

"It's such a massive port I would think virtually everybody has exposure," warned one analyst, adding that this will be bearish for metals as "a lot of Western banks will try to offload material and try not to deal with Chinese merchants."

Reuters reports,

China's northeastern port of Qingdao has halted shipments of aluminium and copper due to an investigation by authorities, causing concern among bankers and trade houses financing the metals, trading and warehousing sources said on Monday. Port authorities could not immediately be reached for comment. China has a public holiday on Monday.

 

"We were told we can't ship any material out while they do this investigation," a source at a trading house said. The port of Qingdao is China's third-largest foreign trade port and the world's seventh-largest port, trading with 700 ports in more than 180 countries, according to its website (www.qdport.com/).

 

"Banks are worried about their exposure," one warehousing source in Singapore said.

 

"There is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists," he said.

Metal imports have been partly driven in China as a means to raise finance, where traders can pledge metal as collateral to obtain better terms. In some cases the same shipment can be pledged to more than one bank, fuelling hot money inflows and spurring a clampdown by Chinese authorities.

"It appears there is a discrepancy in metal that should be there and metal that is actually there," said another source at a warehouse company with operations at the port.

 

"We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper, but we hear that the volumes will actually be higher. It's either missing or it was never there - there have been triple issuing of documentation," he said.

 

Beijing last year set new rules to curb currency speculation amid signs that hot money inflows helped push the yuan to a series of record highs. The rules required banks to tighten the management of their foreign exchange lending and types of clients that are able to access those loans.

 

"It's such a massive port I would think virtually everybody has exposure," the trading source said.

 

"Once the investigation is over, it could be bearish for metals. I think that a lot of Western banks will try to offload material and try not to deal with Chinese merchants," the trading source added.

Critically - this is a major problem for any shadow-banking credit creation process as if the rehypothecated commodity-backed CCFDs are ultimately unwound, 1) someone will not get their collateral (payment problems - bailouts?), 2) less real collateral means less real credit expansion (which banks can;t fill because the firms that use this method of financing are anything but creditworthy), and 3) liquidation of any assets will proceed rapidly...

Goldman concludes that "an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.

 

 

 

Finally, as we showed before when it comes to commodity financing deals, in terms of total notional value, both copper and aluminum pale by comparison to the one metal most used (by value) in China as a funding substitute: gold

As we commented previously:

When we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

 

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.

So if tens of thousands of tons of copper and aluminum are suddenly "missing", one can assuredly say: "at least the gold is still there." Right?

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Wed, 06/04/2014 - 09:25 | 4822787 NoDebt
NoDebt's picture

SHOCKER!  I'm stunned.  "Nobody could have predicted this."

Wed, 06/04/2014 - 09:26 | 4822799 Bunker Boy
Bunker Boy's picture

This should be fun.

Wed, 06/04/2014 - 09:34 | 4822841 smlbizman
smlbizman's picture

so let me get this straight.....no supply equals lower prices....

Wed, 06/04/2014 - 09:36 | 4822858 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Yeah makes perfect sense.

/s

Wed, 06/04/2014 - 09:40 | 4822874 MillionDollarBonus_
MillionDollarBonus_'s picture

Big deal. Most people don't want physical delivery. Only doomer golbugz and a few end users are obsessed with getting the 'physical' metal - settling in cash is sufficient for 90% of market participants.

Wed, 06/04/2014 - 09:43 | 4822882 Harlequin001
Harlequin001's picture

Absolutely, No where are my paper apples...

Now, if I could only work out how to make a new door for my car out of, well, cash...

I know, paper mache, that should be perfectly good enough eh MDB?

Wed, 06/04/2014 - 09:45 | 4822895 nope-1004
nope-1004's picture

I agree.  Bought a corvette the other day.  GM gave me an IOU.  #Happy  #WhoNeedsTheRealThing

Wed, 06/04/2014 - 09:49 | 4822925 MillionDollarBonus_
MillionDollarBonus_'s picture

Derivatives exist for the purposes of hedging and speculation. They are financial instruments. Physical backing is optional and not important for most market participants, so you are blowing this way out of proportion. What's the difference between getting $1m worth of copper or $1m dollars in cash? If the end user wants the copper they can just purchase it with the cash - problem solved!

Wed, 06/04/2014 - 09:54 | 4822948 dryam
dryam's picture

As Chris Martenson nicely sums up what wealth and money are.......There are 3 main types of wealth.  Primary wealth which consists of real productive things such as oil wells, productive farmland, fisheries, mines, etc.  There is secondary wealth which are the byproducts of primary wealth such as oil, fish, the commodities which come frome mines.  Lastly, there is tertiary wealth which consists of things such as stocks, bonds, etc.  Tertiary wealth is simply a claim on the first two types of wealth.  The current system is diverging with contracting primary & secondary sources of wealth, and expanding forms of tertiary wealth.

Problem not solved, problem worsening & headed for a crash.

 

http://www.peakprosperity.com/crashcourse

Wed, 06/04/2014 - 09:55 | 4822962 BaBaBouy
BaBaBouy's picture

YES .... And How About @ The FED ??????????

All THAT GOLD That Should Be There But Is Not ??????

How About That?

Wed, 06/04/2014 - 09:57 | 4822975 dryam
dryam's picture

MBD already knows what I wrote.  He's just here on ZH to spew forth his (the FED's, banks's, etc.) propaganda.

Wed, 06/04/2014 - 09:59 | 4822980 ParkAveFlasher
ParkAveFlasher's picture

I'm sure all that copper and aluminum went into fine crafts that the pigs can now float themselves down the river in.

Wed, 06/04/2014 - 10:02 | 4822997 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Would the Chinese banksters lie? Just like banksters everywhere. The Minsky Moment is here for the failed commie state.

Wed, 06/04/2014 - 10:18 | 4823061 Never One Roach
Never One Roach's picture

<< "there is a discrepancy in metal that should be there and metal that is actually there." >>

 

A real Thriller despite being a recurring theme in today's Potemkin Markets.

Wed, 06/04/2014 - 10:32 | 4823106 gh0atrider
gh0atrider's picture

This is just another stunning example of why only a fool in 2014 would be invested in commodities.  All of the inventories are fake.  Every graph, every chart, everything.... fake.

With Bitcoin everyone on Earth sees exactly how much is in your wallet.  It is validated and cannot be faked.

Wed, 06/04/2014 - 10:46 | 4823159 BrosephStiglitz
BrosephStiglitz's picture

I don't think the technology has existed long enough to make that claim.  If there is any vulnerability in the system someone somewhere will figure out a way to exploit it.

I'm not bashing Bitcoin, I was in the market until yesterday afternoon.  Might buy back in tomorrow during the Asian market open.  But that doesn't mean it is completely immune to market distortions.

Wed, 06/04/2014 - 10:56 | 4823185 Save_America1st
Save_America1st's picture

So lemme get this straight...

phyzz DOES matter?  You mean, you can't just have empy warehouses full of paper and lies with no actual metal and be considered legitimate? 

I'm sure blood is shooting out of Bill Murphy's eyes over at GATA after reading this!

So after this "audit" is complete, I'm thinkin' we should also have full audits of the bullion bank vaults, the Crimex vaults, the Federal Reserve vaults, and last but not least...a full audit of Fort Knox.

I mean, if fundamentals are actually going to matter for the Chinese all of sudden when it comes to accuracy in how much aluminum and copper they have then it's only fair we have accurate audits of how much phyzz gold and silver we have here in the U.S.

 

Wed, 06/04/2014 - 10:58 | 4823196 Badabing
Badabing's picture

@Billion dollar blowjob

Big deal. Most people don't want physical delivery. Only doomer golbugz…………….I’m a Dick….”

Idiot this is copper and aluminum without delivery all industrial production stops.

Did you hear the one about the banker turn farmer? He’s growing paper corn!

 

This post is for the ZH’rs that take you seriously!  

 

Wed, 06/04/2014 - 11:18 | 4823270 svayambhu108
svayambhu108's picture

China scrambling a few eggs.

Wed, 06/04/2014 - 12:06 | 4823465 Beam Me Up Scotty
Beam Me Up Scotty's picture

"With Bitcoin everyone on Earth sees exactly how much is in your wallet"

And therein lies the problem.  Good luck losing it in a boating accident.

 

Knock, Knock......we know you have wealth.....GIVE IT TO US.....NOW!!

Wed, 06/04/2014 - 12:16 | 4823504 DoChenRollingBearing
DoChenRollingBearing's picture

There are ways, not too complicated, where you can acquire BTC as well as cover your trail.

1) Buy BTC for cash

2) Use bitmixer.io and/or sharedcoin.com

3) Have multiple wallets

Only the NSA could track all that down...

Wed, 06/04/2014 - 12:24 | 4823537 Say What Again
Say What Again's picture

Off Topic, but...

 

Did NASD break?!?!?!?

 

No access to trade server

Wed, 06/04/2014 - 12:35 | 4823574 Beam Me Up Scotty
Beam Me Up Scotty's picture

"Only the NSA could track all that down..."

Thats the problem in my opinion, lol.  Not against bitcoin, it certainly has its utility.  Its just not something I find useful if TSHTF.  Maybe it would be great right before the shit flies though.

Wed, 06/04/2014 - 17:30 | 4824654 SWRichmond
Wed, 06/04/2014 - 19:20 | 4825006 A82EBA
A82EBA's picture

gold doesn't disappear when the lights go out

Thu, 06/05/2014 - 01:19 | 4825823 AldousHuxley
AldousHuxley's picture

By 1905, the ROTHSCHILD interest in RIO TINTO amounted to more than 30 percent. 

 

World's largest mining co for copper and aluminum

Wed, 06/04/2014 - 22:02 | 4825458 strannick
strannick's picture

 


Vote up!

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Vote down!

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Seems having all these unbacked claims for limited supplies of metals

Wed, 06/04/2014 - 11:00 | 4823202 Manthong
Manthong's picture

WTF?  Do they think they are special or something?

.. that there is actually anything there to back their paper?

Wed, 06/04/2014 - 11:15 | 4823260 Son of Loki
Son of Loki's picture

"If you don't hold it, you don't own it."

...and one of the corollaries:

"If you don't hold it, it ain't there."

Odd how some peeples don't see that at this late stage in the game after all the Fraud they have seen on Wall Street and across the Globe. Why do you think Indians and Chinese buy phyzzical silver, gold, and so on.....

Hundreds of years of history and learning there.

Wed, 06/04/2014 - 21:31 | 4825358 BrokusDickusMaximus
BrokusDickusMaximus's picture

Let me get this straight. Chavez got Venezuela's 200 tons from England because he came with a ship and got it. The US Fed told Germany we'll give it up in dribs and drabs. Austria just wants to look at their gold held in England. Who exactly has their hands on the phyzz gold? Some say Ft. Knox is empty. What happened to the gold held at WTC towers when they fell? Where are the gold bars? I'm thinking it's in Asia.

Wed, 06/04/2014 - 10:57 | 4823188 THX 1178
THX 1178's picture

Only a matter of time before the same happens with gold and silver. Then the comex and lbma are dunfer.

Thu, 06/05/2014 - 01:30 | 4825845 Manthong
Manthong's picture

Don’t forget ABN Amro and Rabobank..

The run on them followed our happy delivery news to Germany and that is what kicked off the vicious gold suppression by the Central Banks.

Chavez got his just in time and was probably the last.

Wed, 06/04/2014 - 10:49 | 4823165 THX 1178
THX 1178's picture

No supply equals lower prices? No.

Low supply equals lower paper prices.

Wed, 06/04/2014 - 19:13 | 4824984 FinalEvent
FinalEvent's picture

And more important, we know exactly how much there is and there will ever be.

 

Wed, 06/04/2014 - 19:18 | 4824998 thisisjustarand...
thisisjustarandomusernameicreatedforzerohedge's picture

yup

this is a great article, BTW, Zero Hedge

 

recently I have been quite critical of the China articles here, bordering on sounding like a 'defense squad' or 'apologist' despite my attempts to just be critical of sensationalism

 

so I just wanted to say that any time I've been critical of recenty ZH articles on China, it was PRECISELY because THIS is the type of article I know this website can feature, and this is exactly what I come here for. so I just wanted to give some kudos.

Wed, 06/04/2014 - 22:03 | 4825465 Lionhearted
Lionhearted's picture

Can you fake real gold? No. But you can fake things made out of nothing that represent real things all day long (See any kind of paper that represents wealth). So I will take my real gold over your fantasy paper any day of the week. In the end I can convert my REAL pms into dollars, bitcoins or what ever else I want, today, tomorrow or anytime in the future. I am building my own gold standard.

Thu, 06/05/2014 - 17:34 | 4828138 FinalEvent
FinalEvent's picture

Yes you can fake gold.

You can gold plate tungsten.

Also, nobody knows for sure how much gold there is. It is always an estimate and the one who is able to hide the biggest stack wins!

Thu, 06/05/2014 - 01:24 | 4825836 TheReplacement
TheReplacement's picture

Can't be faked?!?  What exactly happened at Mt. Gox?

Thu, 06/05/2014 - 17:35 | 4828140 FinalEvent
FinalEvent's picture

If you don't hold it, you don't own it.

Goldbugs should know better...

Wed, 06/04/2014 - 10:39 | 4823131 Mesquite
Mesquite's picture

But the difference, in China, the banksters, if found guilty, will get more than just a fine.. (As I'm sure many already know...)

Wed, 06/04/2014 - 20:09 | 4825148 thestarl
thestarl's picture

The bankers are only an extension of the party in China,let them face the music.

Wed, 06/04/2014 - 10:00 | 4822954 BaBaBouy
BaBaBouy's picture

.

Wed, 06/04/2014 - 14:09 | 4823901 Murf_DaSurf
Murf_DaSurf's picture

 

 

 

Only problem I see is for the Bankers, the ones to be rounded up and Shot next week when the investigation is 'complete'

Wed, 06/04/2014 - 09:53 | 4822956 nope-1004
nope-1004's picture

The point of the article is that.... they already did purchase the copper!  And it's gone!

 

Wed, 06/04/2014 - 10:21 | 4823078 Peter Pan
Peter Pan's picture

It's the same with banks. People think there money is there but in reality it isn't.

Wed, 06/04/2014 - 22:08 | 4825483 Lionhearted
Lionhearted's picture

The currency may be in the bank and the amount of dollars is the same as it was yesterday but it's value is going down quickly. BTW the gov can reach in anytime they want and take it.

Wed, 06/04/2014 - 11:13 | 4823255 PT
PT's picture

Rehypothecated copper that isn't there? Doesn't that mean a scramble for phys?  Doesn't that mean prices go up?  Or was the rehypothecated copper purely used as collateral for loans?  And now the loans are non-performing, the copper gets repossessed, the banks are left with an over-supply and the price goes down?  Except for that magic word, "rehypothecated", which means the copper isn't there so there is no over-supply.  Someone just has to sort out all the IOUs, net them out and then eventually someone is owed some copper which may or may not be there ... ummm, maybe I'd better read the article again.

Wed, 06/04/2014 - 16:40 | 4824496 mkkby
mkkby's picture

Another nothing burger.  All bread and no meat.

So some chink banks will be even more insolvent than before.  Nothing another POMO can't solve.  BTFD and wait for the real event. 

Real event comes after most of the EU countries, Japan and UK "go Greece".  Then there will be a flight from the dollar.  We be f***ed.

Wed, 06/04/2014 - 19:23 | 4825014 11b40
11b40's picture

Let me know when you get it figured out.

Wed, 06/04/2014 - 23:22 | 4825655 PT
PT's picture

Ditto.  Maybe I'm not reading hard enough.

Didn't the Squid have a nice big stash of Al in some dead city somewhere? Actually, I think they got rid of it a year or so ago but it had to go somewhere.

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