Dutch lender claims ICBC failed in its obligation to collect metals sold by cash-strapped commodity trader MaikeChina’s largest bank is being sued by Dutch lender ING for losses suffered in a batch of copper deals in a case that highlights the risks of servicing the scandal-plagued world of commodity trading.
A Hong Kong court has ruled that Amsterdam-based ING claims $170mn from Industrial and Commercial Bank of China for breaching contract terms. The bank allegedly released export documents without collecting payment.
Ing booked losses on metals that were sold by Triway International to China’s largest copper trader Maike Metals International. Triway is a wholly owned subsidiary of Maike, located in Hong Kong. Maike deposited money with ICBC, and Triway with ING. However, the latter trader never received payment, and ING was financing the deals.
ICBC’s alleged contract breach occurred just before Maike announced a liquidity crises in September last year when it stated that it would be forced to sell assets and shares as it was running low on cash.
The commodity trader that handled a quarter the country’s refined imports of copper, but is currently being restructured became squeezed when it raised short-term funding, using its copper stock as collateral, in order to invest on China’s real estate market. These investments went bad due to Beijing’s strict zero-Covid policy and the rigidity of its zero-Covid policies.
Maike’s financial problems have added to the concerns over the metals trading industry, which has recently been rocked with a number of frauds. Glencore and global trading groups stopped providing Chinese metals merchant Huludao Ruisheng after $500mn of copper disappeared last year. Trafigura, a Singapore-based trader, said it was the victim in January of a $577mn fraud involving nickel. bags containing stones were found instead of nickel at a London Metal Exchange last month.
ICBC is the principal bank of Maike. Its headquarters are in Xi’an (the capital of Shaanxi, a province located north-west of China). ICBC fired the chief of its main Xi’an office last October due to problems with the international trade finance business, according a report by the Chinese financial news outlet Caixin. The report stated that Maike was its biggest customer.
According to a source familiar with the situation, ING has been asked by the China Banking and Insurance Regulatory Commission (the country’s leading banking watchdog) about the legal action.
Western commodity traders, financiers and investors believe that the outcome of this lawsuit will determine the level of confidence in commodity financing to continue in China. Western banks are slowly withdrawing from the type of lending that they used to dominate in mainland China, after experiencing losses and fraud.
JPMorgan Chase is one of them. After acting as the counterparty for China’s biggest stainless steel producer Tsingshan whose significant short position was at the heart of the suspension on nickel trading in the LME a little over a year before, JPMorgan Chase has significantly reduced its exposure to Asian customers.
Colin Hamilton, director of commodity markets at BMO Capital, stated that the confidence banks have shown in the arbitration system offered by the courts has helped to mitigate their concerns.
He said that “this [case] could raise governance concerns to a new level.” “We might even see some sort of ‘governance fee’ charged [by banks] on trade finance to China to cover legal costs and insurance costs.”
The Hong Kong High Court heard the case on 12 April.
ING, Maike, and the law firms Reed Smith, King & Wood Mallesons and King & Wood Mallesons who represent ING, ICBC, respectively, declined to comment. ICBC and CBIRC didn’t immediately respond to requests for comments.