Scandal squeezes funding for commodity sector

China's metals industry is grappling with tougher credit conditions that are likely to persist and spark consolidation after a financing scandal at Qingdao port roiled the market, said an executive at one of the world's biggest commodity traders.

Simon Collins, head of metals and minerals at Trafigura Beheer BV, said that miners, smelters and fabricators were facing a harder time getting credit since the Qingdao scandal broke in June.

"A lot of people in the industry are finding it difficult ... that is the new status quo and it will bring about further consolidation," he told Reuters.

Chinese authorities launched an investigation into whether a private metals trading company had used fake warehouse receipts at Qingdao, the world's seventh-busiest port, to obtain multiple loans against a single metal cargo.

More than $1 billion in claims are being pursued. Banks have tightened risk controls, which has curbed access to credit and squeezed the metals trade.

"The credit review process has been very stringent by the top five banks and second-tier banks, which has affected people in two ways: Either because it's taken a longer time to renew their credit lines, or their credit lines are being cut," he said.

Those steps have worsened a credit shortfall in the world's biggest buyer of most commodities, but trading houses have stepped in to fill the gap.

"You'll find that trading houses have very good access to liquidity and access to markets, so that gives them an opportunity in an environment in which there are cash flow issues," he said.

While expectations of a copper surplus this year have evaporated, Collins said he still expected an oversupply in 2015, though perhaps smaller than some have predicted.

Chinese copper refineries have generally been running below capacity due to a scrap metal shortage, while demand may remain reasonably strong given supportive infrastructure policies, he said.

"The downside is that I don't think we'll see a huge amount of volatility in the copper market."

Instead, he said spread volatility in the aluminum market would be more of a feature due to a shortage of available metal.

"It's traditionally been the laggard that nobody wants to trade. It's starting to look a lot more interesting," he said.

"Nickel I think is still interesting. The underlying story is unchanged, and that is one of raw materials shortage," Collins added.

Nickel prices spiked this year before erasing almost all gains after Philippine producers stepped up exports, plugging a gap that opened when Indonesia banned ore shipments.

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