FOCUS: Chinalco Copper a victim of trading fraud [CORRECTION]

China has a new metals fraud case, one that has a state-owned enterprise at the center of it.

State-owned Chinalco Shanghai Copper alleges that one of its trading subsidiaries paid more than $6 million for 900 tonnes of domestically warehoused copper from another trader, Jiangsu Trade Gold Supply Chain Management, only to discover that the material did not exist, company documents seen by Fastmarkets show.

Jiangsu issued delivery orders, which indicate ownership but are not independently verified bearer warrants, to Chinalco Shanghai Copper, which in turn sold the copper and provided accompanying order details to Shanghai Fuye Copper and Shanghai Pumin Industrial.

These order details, which indicated the copper cathodes were held in domestic warehouses, were found not to be valid and the metal was not there, the documents, which are dated May 31, claim.

“After signing a contract with our company and collecting the payment of our company and issuing a delivery order, it is out of stock, and the amount is huge. [This] behavior has been suspected to constitute fraud,” Chinalco Shanghai Copper says in the documents.

A taskforce made up of local copper industry executives has so far ensured that around half the funds will be returned to the eventual buyers. Still, the case raises questions about why the industry continues to encounter situations where an apparent lack of due diligence results in parties potentially losing out on millions of dollars.

While the fallout has so far been limited to Chinese domestic trade, the cases have already had a profound effect on the Shanghai copper market and prompted concerns about the lack of due diligence.

“It’s very common for domestic traders to issue a delivery order and for this to be passed on without checking whether the cargoes are actually there,” a Shanghai-based copper cathode trader who declined to be named said.

“It has already influenced the market - companies will more put more emphasis on compliance after this,” the trader said.

Other companies that have bought copper cathodes but were issued fake delivery orders include Ningbo Jintian, at 2,000 tonnes and Jiangtong, at 300 tonnes, informed sources told Fastmarkets. This brings the total value to around $18.5 million, if using an LME three-month copper price of around $5,800 per tonne, as of June 12.

Chinalco declined to comment when contacted by Fastmarkets on Monday 11, Tuesday 12 and Friday 14 June. Jiangsu Trade Gold Supply Chain Management - a wholly owned subsidiary of Ningbo Nanche Industrial Base Union Import & Export Co - did not respond to requests for comment made to its legal representative.

Participants in China’s copper market are calling on each other to boost their vigilance in domestic copper trades.

“Pay special attention to the source of electrolytic copper when procuring in the near future, be aware of passing the risk on further downstream into the market,” a notice shared on the Chinese social media platform WeChat reads.

Premium increase for prime brands
A temporary lack of faith in domestically traded copper cathodes has caused premiums for prime brands to rise as well as a preference for cif cargoes.

Fastmarkets’ assessment of the premium for grade-A, electro refined (ER) copper cathode, cif Shanghai, was at $60-70 per tonne on June 11, up by 10% since the start of the month.

The premium hit a two-year low at $45-60 per tonne on May 14, succumbing to pressure from the enduring trade dispute between China and the United States.

“It’s really affected the premium for imports… brands like Enami, CCCP, Onsan and Temano P are in high demand now,” the first Shanghai-based trader said.

(This article has been updated to show that warehouses are not connected to the fraud experienced by Chinalco Shanghai Copper, which is alleged to have been committed by Jiangsu Trade Gold Supply Chain Management.

In the Chinese domestic market, ownership of warehoused metal can be transferred without necessitating proof of the material’s existence through a bearer document such as a warehouse warrant or receipt.

In this case, Chinalco Shanghai Copper accuses Jiangsu Trade of supplying it with delivery orders that were certified by Jiangsu but would have had no need of stamped approval from a warehouse or any other third party, indicating that it would supply the copper cathodes. But Jiangsu is alleged not to have the cathodes with which to supply Chinalco.

While fraud is alleged to have taken place, in this instance, the case differs from other cases of warehouse fraud, where actual warehouse bearer documents were either illegally photocopied or created.)
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