By John Richardson
AS a senior Chinese official announces that investigations into metals trading fraud have been extended from 13 to 24 provinces, and that $10bn worth of fraud could be involved, it stands to reason that these complex webs of transactions do not just include metals.
And so you need to ask yourself this question: Hand on heart, do you have complete knowledge of where all your chemicals and polymers volumes end up when you export to China?
Or is it more a case of “sell and hope” that all of your volumes swiftly and seamlessly end up in finished goods sold to the final consumer?
“We can only deal with the big first-level distributors in China because we do not have enough people on the ground – the cost would be too great,” said polyolefins industry source, in answering our two questions.
“Once our resin leaves these big distributors, we have no real idea where some of our material ends up.”
This has always been the case because of the geographic size and complexity of China’s chemicals market.
But in the past it didn’t really matter, as economic growth was going in one clear direction – constantly higher. This meant that inventory overhangs were never that big and when they occurred, very quickly disappeared.
Throughout this year, though, we have been warning about the mismatch in “real” demand growth estimates for polyethylene (PE) and the local production and import numbers.
Something feels as if it is wrong – and this matters much more today because of all the uncertainties around the future direction of economic growth.
Even if direct fraud is not involved, it looks probable that large volumes of PE have been used as collateral to raise money for other purposes.
In late August, we heard of two plastic processors in China who were in financial difficulties because they used PE as collateral for speculation that went wrong.
And two weeks ago we heard of a police raid on a polyester producer in China, during which it was claimed that 100,000 tonnes of the monoethylene glycol (MEG) it had in storage belonged to someone else.
This fits with reports we picked in early August of MEG being used as another speculative tool.
Ever more complex webs of commodities fraud are being spun at the moment, as chemicals cargoes, and the money raised through letters of credit, pass from one company to another and back again.
These complex webs are, we think, all about trying to make money out of the shadow banking system, where potential returns have skyrocketed thanks to financing shortages amongst real-estate developers.
But so have the potential risks.
Here is warning: There could be another police raid coming to a distributor/chemicals trader near you.