Shanghai, 17 January 2012: Reuters

Metals traders in China had a tough time last year as shrinking bank credit choked up their cash flow, but one successful merchant trader managed to circumvent the restrictions through a paper trade it now wants to expand into copper imports.

Ocean Resources, part of a conglomerate based in the southeastern Shaanxi province, is a metals trader with few downstream customers. Instead, it boosts its cash flow by trading commercial invoices with other traders in the country.

This trade is similar to operations on the London Metal Exchange, the world's biggest marketplace for industrial metals, where trade of warrants, or paper titles referring to a specific parcel of metal in a set location, is commonplace. Unlike the LME, flipping paper is not regulated by the Shanghai Futures Exchange, but it helps beef up a company's domestic turnover -- which in turn burnishes its credentials to obtain letters of credit (LC) from banks.

This is one way domestic traders have managed to circumvent Beijing's stranglehold on credit, and Ocean Resources is one of the bigger companies that have succeeded in doing so.

Now, with a $30 million LC under its belt from Standard Chartered and credit lines from Standard Bank, thanks to 2011 turnover of almost 5 billion yuan ($793 million), the company is seeking to ramp up its real operations in China's domestic market, while also sourcing material from abroad.

"At the moment we need long term and steady imports from overseas. We don't care whether they (suppliers) are big or small, as long as they can supply us the goods," Duan Hansen, the firm's assistant general manager told Reuters in an interview in Shanghai.

"We are seeking connections with real suppliers, with manufacturers, with miners, with smelting plants -- connections up and downstream," he added.

Ocean Resources, which also has businesses in real estate, insurance and finance, currently trades around 330,000 tonnes of domestic zinc per year in this way, which accounts for roughly 80 percent of the firm's turnover. Its commodity arm also trades copper cathode. This type of physically-backed paper trade is a low margin game and gives profit of only around 10-30 yuan per tonne on a 57,740 yuan tonne of copper cathode, Duan said. But total turnover is a key measure used by banks to grant credit.

FUTURE FOR COPPER BRIGHT

Ocean Resource's paper trade is different from the more typical commodity-backed financing in China, whereby traders use metals stocks as a type of collateral to secure bank loans.

The practice so popular that experts have warned that China's copper import data was no longer a good measure of industrial strength, as most of those imports were being stockpiled rather than consumed. Hansen said Ocean Resources has not dabbled in this cash-for-commodity-imports business, although the firm is planning to increase its copper imports.

This is in part due to copper's brighter fundamental outlook. The metal's high unit costs will also translate into a fatter turnover, which would help the firm obtain higher credit to fund its expansion, he said.

"For 2011, our main task was to enter the upstream market, to get to know the different suppliers, and not just the traders or the smelting plants," Duan said, adding that the firm plans to import 100,000 tonnes of copper from abroad in 2012.

"This year, we want to go downstream and sell directly to end-users in the different plants and in different provinces, such as Zhejiang, Jiangsu and Guangdong." Duan sees Chinese copper prices hovering between 55,000 to 65,000 yuan this year, and unlikely to touch 70,000 yuan as end consumers have smoothed out their price management and no longer rush to get in when prices take off.

"After the Lunar New year, prices for copper, zinc and lead will go up slightly but...prices won't revisit highs like before," he said. China is the world's biggest consumer of metals, accounting for some 40 percent of global demand for refined copper which is used in power cables and consumer goods such as air conditioners.

Ends --

By Melanie Burton, Reuters - for Commodities Now with permission.