Collateral damage from Qingdao probe

Investigations into irregular financing using copper send global prices lower, reports Wei Tian from Shanghai

Copper markets are being shaken by developments at Qingdao Port, where metal inventories have reportedly been used in fraudulent ways to raise funds.

Officials are looking at whether metals stockpiled at Qingdao Port fell short of obligations used to secure loans, and they're focusing on Decheng Mining, a Qingdao-based private metals trader, Reuters reported, citing two police sources with direct knowledge of the matter.

Public security authorities are probing alleged fraud involving materials held in its Dagang bonded storage area, Qingdao Port International Co said in a statement on June 6.

Claims that single batches of copper and aluminum at Qingdao Port were pledged as collateral for multiple loans could undermine a broader practice under which traders use everything from iron ore to rubber to get funding.

Benchmark copper futures in London have fallen amid concern that the probe at Qingdao will curb demand for the metal. Copper has lost 9.2 percent this year, making it the worst performer among the six main metals on the London Metal Exchange.

Analysts at Goldman Sachs Group Inc said the price may further fall to about $6,200 a metric ton before the end of this year from about $6,660 at present.

Copper has also been declining in New York as the investigation erodes demand prospects, with the benchmark futures price down 11 percent this year on the CME Group Inc's Comex in New York.

In addition to weighing down copper prices, observers said the investigation may curb foreign exchange inflows to China.

"Feedback from trading house contacts suggests that this investigation has cast a pall on the financing trade as a whole," Barclays Plc analyst Sijin Cheng wrote in a report.

"The developments in Qingdao are likely to continue the significant scaling back of forex inflows from foreign banks into China via commodity financing business," Goldman Sachs said, adding that foreign banks may lend less money against commodity inventories in China.

"This investigation may lead to a 'freeze' in activity," Deutsche Bank AG said in a report. "We also believe it is likely to raise market awareness of the risks involved in commodity financing."

While there is still considerable uncertainty regarding the extent of fraudulent transactions, this will be another step in cleaning up commodity financing in China, Deutsche Bank said, adding that the move could lead to much tighter audit rules for warehousing receipts over the medium term, which could raise the cost of repurchase deals.

Robust growth at Shanghai port	Qingdao Port: Shipments unaffected by investigation