CWT unfazed by Qingdao commodity scandal

Trade flows feared to crash after steel-for-loan fraud.

CWT stands unfazed amidst the recent Qingdao commodity scandal, OCBC noted in a report today.

A Dagang-bonded warehouse at Qingdao Port recently came under investigation for the fraudulent practice of pledging single batches of metals as collateral for multiple loans.

According to OCBC, “CWT’s revenue exposure to Qingdao port comes from collateral management service under its Logistics segment, which we understand from management is negligible. Thus, we do not expect Logistics earnings to be adversely affected. The incident’s indirect effects, through tighter credit and moving stocks offshore, will lower liquidity and commodity trade flows.”

Here’s more from OCBC:

We examined a similar steel-for-loan fraud in 2012 and found that the shock factor to market and impact on physical trade flows lasted only a few months.

We think it would be similar this time round unless the probe widens significantly. Moreover, given that CWT’s Logistics revenue exposure to China is less than 3%, we think the segment will be little affected by the systemic impact.

The indirect impact of the Qingdao port incident comes from: 1) banks reportedly scaling back on loans backed by commodities, 2) banks seeking higher margins, 3) requiring buyers to be found first, and 4) moving collateral to better regulated locations outside China. Collectively, they will lower liquidity and commodity trade flows in China.