Mining group Glencore faces disruption at its largest partner for selling refined copper in the Chinese market as Maike Metals International, a powerful trading house, grapples with a liquidity crisis.
The slowdown in the Chinese economy and the downturn in the real estate market have caught out several domestic trading houses, leading to a string of recent scandals including missing copper at warehouses.
Glencore was selling about 600,000 tonnes a year of high purity copper into China through Maike, before the Xi’an-based trading group ran into liquidity constraints, according to people familiar with the matter. That level is equivalent to a fifth of Glencore’s sales of copper metal and concentrates last year, according to its annual report.
Glencore’s sales volumes through Maike had more recently been reduced, one of the people added.
Maike was Glencore’s biggest local intermediary to market refined copper used in everything from electric wiring and cabling, accounting for 80 per cent of its copper sale volumes in the country.
But Maike ran into trouble earlier this year, and its founder He Jinbi admitted last month that it was facing liquidity issues. Last week, He told the Financial Times that Maike is selling assets and studying a broader restructuring to survive the crisis. It is also working with creditors who have agreed to extend existing loans.
Maike, founded by He in 1993, grew into one of the most important bridges between big international trading houses and Chinese consumers with revenues of Rmb160bn ($22.6bn) in 2021.
The trading house used imported metal to raise financing from banks with usually 90 days to repay, which He then ploughed into China’s property sector, according to traders. The company had property investments of Rmb6.65bn, or around 60 per cent of its illiquid assets, at the end of 2020 according to a report by China Lianhe Credit Rating, a Beijing-based rating agency.
Now that China’s real estate sector has slowed, Maike is laden with bad debts that it is struggling to repay to creditors. The largest were the Xi’an branches of the Bank of Beijing and Industrial and Commercial Bank of China, according to company filings for mid-2021.
At the end of June 2021, lenders had extended credit lines of about Rmb10.6bn to Maike, of which it had used Rmb9.6bn, according to the company’s filings. It also had three bonds with an outstanding value of Rmb3.3bn, according to data provider Wind Information. He said in the latest interview that the firm still has an outstanding bank debt of about Rmb7bn.
London-based ICBC Standard Bank has been moving some copper stocks that were collateral for its lending to Maike outside China, according to two people familiar with the matter. JPMorgan, another of its financiers, has been liquidating stocks in bonded warehouses at the ports within China they added.
Foreign lenders have become increasingly nervous about financing commodity trading in China after a string of problems at trading houses.
The credit squeeze has made it more difficult to get physical copper inside China, and copper stocks in Shanghai are close to their lowest level in a decade.
Other large copper miners including the world’s largest mining group BHP and Chile’s Codelco have also paused sales to Maike as it works to resolve its liquidity issues, according to commodity trading executives.
Foreign groups including Glencore, Mitsui, Trafigura, Codelco and Aurubis supplied 30 per cent of Maike’s annual imports in 2020, according to China Lianhe Credit Rating. A person familiar with the matter said Trafigura had not done any business with Maike this year.
Glencore, BHP and JPMorgan declined to comment. ICBC Standard and Codelco did not respond to requests for comment.
Maike’s He said the group is actively selling fixed assets and equities to replenish its liquidity and reduce debt, using the expression “breaking arms to survive” — meaning sacrificing parts of the business in order to save it.
Commodity traders expect state-owned firms to provide financing lines to steer the company through the liquidity crisis. Maike’s He told the FT that the group is discussing an investment with state-owned groups in the central city of Xi’an, but did not reveal details.
In August, Maike established a joint venture with a local government financing vehicle backed by the city of Xianyang in Shaanxi province.
A copper trader at a state-owned futures firm said that a firm affiliated to Shaanxi province is mulling a stake purchase and cash injection into the company since it is so vital to the local economy.
When asked about Maike’s heavy reliance on short-term financing using metals as the pledge, He said: “The entire private sector has encountered a lot of liquidity difficulties this year, and we are no exception.”
One senior copper trader said: “It coincides with whether they are politically too big to fail for the province. I hope they can’t come back. These guys are the last of a dying breed of Chinese traders who use the import of copper to raise funding.”
Source: Economy - ft.com
