Exclusive: Ghost warehouse stocks haunt China’s steel sector
China’s demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world’s largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world’s steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
“What we have seen so far is just the tip of the iceberg,” said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. “The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry.”
The Shanghai government’s asset regulator said that it had sent a note to state-owned firms in August asking them to verify receipts for stored metal on financing deals they had with steel traders.
Police have arrested an employee from Baoyang Warehouse in Shanghai and are investigating documentation for steel stocks that the employee issued to a trading firm, said an official with the surname Ou at Baoyang. Baoyang is owned by China Railway Materials Shanghai Company Limited.
Reuters was unable to contact a member of the police force that could comment on the investigation.
The trade firm used the stocks more than once as collateral to obtain loans, said an executive at Shanghai Minlurin, another trading firm that had steel stocks in the warehouse. The receipts used were for steel worth around 380 million yuan ($59.96 million), the executive said.
Similar cases have prompted some trading houses to temporarily halt transactions related to warehouse receipts, disrupting China’s steel business, traders said.
“We have suspended business for days as we are afraid we won’t be able to get any stocks from the warehouses if we get a fake receipt,” said one Shanghai-based trader.
BANKS BOOST MONITORING
Banks, too, are giving less credit against warehouse receipts.
“Fake warehouse receipts have become a problem for some banks and because of this, many banks have boosted monitoring of existing stocks at warehouses and temporarily stopped accepting steel stocks as collateral for loans,” said a Shanghai-based branch manager from a Chinese bank who declined to be identified as he was not authorized to speak to the media.
Steel mills and end users rely heavily on trading firms to keep steel flowing from producers to consumers. Steel traders often buy consignments with full payment, ensuring cash flow to the mills. End users can buy small volumes from the traders, more convenient for them than the big volumes the mills sell.
Industry sources estimated cases that have already come to light account for about 5 billion yuan ($787.50 million) of bad debt in Shanghai, one of China’s biggest steel trading centers.
At another warehouse, a logistics unit of giant steelmaker Baosteel rented a small office to a company called Shanghai Yiye Steel Trade Market Management Co Ltd. Documents were forged stating Yiye was the owner of some of the steel stored in the warehouse, said Wang Xueying, the spokeswoman for the unit called Shanghai Baosteel Logistics Co Ltd.
Yiye used the documents in dealings with two companies, China Railway Harbin Logistics and Wuhan Iron Yitong, the spokeswoman said.
The two companies came to the warehouse to collect the stocks only to find that Yiye did not own the materials, she said. The case is still under investigation, she added.
Nobody answered telephone calls to Yiye made by Reuters to request comment for this story. Both China Railway Harbin Logistics and Wuhan Iron Yitong declined to comment when contacted.
($1 = 6.3376 Chinese yuan)
(Editing by Simon Webb and Ed Davies)
When discussing China, the adjective ” Ghost” often comes to mind .
China has numerous Ghost Cities….Entire Cities built with no residents.
Why, you may ask, would they do that ?
IMHO, its a window to a political and economic system that does not follow the global norm(not that the global norm is at all admirable). China, of course is so large it can develop its own system and compete directly with ours.
From what I can gather, the Chinese hybrid Communism/Capitalist system has certain goals, ie GDP growth objectives that must be met for each area. It doesn’t seem to matter how they are achieved, as long as they ARE achieved .
This is what concerns me about our own local economies. We have become so reliant on ” Sources of Money UNknown” we have no clue as to how long the flow will be maintained. IMHO, people that feel the party will go on forever given China’s past growth and current population will be in for a major MAJOR epiphany.
I would submit that with respect to BC and moreso the Metro Vancouver area, we were spoiled via the post Expo 86 countdown to Hong Kong’s being taken back by Mainland China….. and the exodus of ” scared money” (NOTE: I also wish to add that I have always suspected the EXPO 86 true intent was as a means to showcase Vancouver to the world, and mainly to the potential Hong Kong investors…)
However, Mainland China did not want to rock to boat, but maintain the status – quo and encouraged a capitalist system. This also created new wealth, and BC benefitted from this 2nd wave of Chinese investment . In addition, the Federal Gov’t was lobbied into allowing cheap mortgages so now we really heated up the economy. Duly note no long- term real jobs were created…it seemed to be solely focussed on Real Estate.
Back to China…..if their economic system , that we became dependent on is proven to be a house of cards…aka Ghost Cities …..Ghost Steel…..Ghost____???? ……we have left ourselves and future generation extremely vulnerable to a major economic collapse. All the signs and examples are there. What then ?