Missing Qingdao Copper Spawns Web of Lawsuits
China Metal Scandal Has Banks, Commodities Traders Entangled in Probe
The suits, which have been filed in Hong Kong, Singapore and London, show what happens when trade-finance deals that are done every day go sour. Chinese authorities and bankers are investigating whether traders fraudulently used the same stockpiles of metals to secure multiple loans from Chinese and foreign banks.
Some lawyers have had to dust off old legal books to understand the laws in Hong Kong and elsewhere that govern what appear to be hundreds of millions of dollars in disputed claims.
"With a relatively large number of parties involved, the structures are highly diverse and, therefore, when things go wrong the litigation may appear convoluted," said Carolyn Dong, partner at law firm DLA Piper in Hong Kong.
The probe is looking into whether entities linked to Decheng Mining Ltd., based in the eastern port city of Qingdao, illegally pledged the metals as collateral to get the loans, according to court documents and executives at banks that made some of the loans
Foreign banks and commodities firms have exposure to potential losses of close to $1 billion, while the estimated exposure for Chinese banks stretches into the billions of dollars, according to court filings, public statements by the banks and analysts' estimates.
Decheng is owned by Singaporean national Chen Jihong, who was detained by authorities as part of the investigation. Mr. Chen is also chairman of Decheng Mining's parent, Dezheng Resources Holding Co., and is a director of Hong Kong-based Zhong Jun Resources Co., which has offices in Singapore.
The operator of Qingdao port has confirmed that authorities are conducting an investigation into fraud. Neither Decheng Mining nor Dezheng Resources could be reached for comment.
Many of the legal cases involve banks, which lent money to commodities traders, including Decheng, and took the metal as collateral.
Citigroup Inc. C +0.79% and Swiss-based trader Mercuria Energy Group Ltd. are engaged in legal proceedings against each other in a London court over payments relating to metals-backed financing arrangements in Qingdao and Penglai ports valued at more than $270 million. Penglai port is about 150 miles north of Qingdao.
Impala, the warehousing and logistics subsidiary of commodities-trading company Trafigura Beheer BV, has filed at least six claims in London against a number of parties, including Mercuria Energy and Standard Chartered PLC, to ensure any disputes over its contracts relating to metal held in Qingdao are fought in U.K. courts. Trafigura declined to comment.
South Africa's Standard Bank PLC and Dutch bank ABN Amro Bank NV have also launched cases. In Singapore, ABN Amro won a Singaporean court order for Mr. Chen to pay it $22 million owed under a loan agreement with Zhong Jun Resources and another of his companies.
HSBC Holdings HSBA.LN +0.20% PLC has also launched legal proceedings against Zhong Jun Resources. Other foreign banks that have exposure to the deals are French banks BNP Paribas SA BNP.FR +1.02% and Natixis SA KN.FR +0.63% . Standard Chartered said it has made provisions for about $175 million in potential losses from a total exposure to Qingdao port of $250 million. But the bank said it doesn't expect to realize the full losses it has allowed for."All the banks, local and foreign, have been completely taken by surprise," said Jaspal Bindra, head of Standard Chartered's Asian operations, in an interview last month.
At the heart of the issue are criminal investigations, claims and counterclaims for commodities promised as collateral, claims against warehouse managers and Qingdao port; arguments that agreements have been breached, and questions about insurance policies.
"When there is a default of this nature, there is a spider's web of contractual relations, and the risk of the default has been dispersed among the banks, insurers and traders," said Matthew Cox, banking and finance lawyer at Dentons UKMEA LLP in Singapore.
In some cases, bank executives are looking into whether fake documents were provided to prove that metal promised as collateral was in place. Much remains unclear. Access to storage facilities in Qingdao and Penglai ports remains restricted.
The impact on copper imports, as well as prices, appears to have been modest. China's copper prices haven't changed much since the probe was launched, while imports fell slightly. After an initial hit that pushed copper prices as low as $6,661 a ton in early June, just after the scandal broke, the price of copper quickly recovered and traded Monday near $6,869 a ton.
For the banks, the suspected fraud is a warning shot. They are revisiting lending processes and increasing oversight of clients, executives said.
Vivienne Lloyd, base metals analyst at Macquarie Securities, said banks have tightened up on issuing letters of credit, which has made it harder for importers to get hold of metal.
"It has definitely changed the conversation around risk in metals financing," Ms. Lloyd said.