Tycoon who runs a quarter of China’s copper trade is at stake

0
77

(Bloomberg) — From the outset guarding trains full of metal against thieves on frigid winter nights, He Jinbi built a copper trading house so powerful it could handle one of every four tons imported into China.

Most read by Bloomberg

Born a trader with an infectious sense of humor, 57-year-old Maike Metals International Ltd. in the early 2000s became an important link between the industrial heart of China and global traders such as Glencore Plc.

Now Maike has a liquidity crisis and his empire is under threat. The ripple effects were felt around the world: The company processes one million tons a year — a quarter of China’s refined copper imports — making it the largest player on the major global trade route for the metal, and a major trader on the London Metals Exchange.

With his wide network of contacts that give an enviable insight into China’s factories and construction sites, he was a poster child for China’s resource-driven boom for two decades – making a fortune from his ravenous demand for raw materials, then plunging it into the red- hot real estate market.

But this year, Beijing’s restrictive Covid Zero policy has hit both the real estate market and copper prices hard. After months of rumors, he publicly admitted last month that Maike had asked for help in solving liquidity problems.

He said the problems are temporary and affect only a small part of his business, but his trading counterparties and creditors are cautious. Some Chinese domestic traders have suspended new deals, while one of the company’s longest-standing lenders, ICBC Standard Bank Plc, was so concerned it was pulling some copper from China that had backed its loans to Maike.

Even if it can get the backing of the government and state banks, industry leaders say Maike may struggle to maintain its dominant role in China’s copper market.

While its emergence was a microcosm of China’s economic boom, its current woes could spell a turning point for commodities markets: the end of an era when Chinese demand could only soar.

“In a way, Maike’s story is the story of modern China,” said David Lilley, who began working with Maike in the 1990s, first as a trader at MG Plc and later as a co-founder of trading house and hedge fund Red Kite. . “He has expertly driven the dynamics of the Chinese economy, but no one was prepared for the Covid lockdowns.”

This account of He’s rise to the pinnacle of China’s commodities industry is based on interviews with business partners, rivals and bankers, many of whom asked not to be named due to the sensitivity of the situation.

See also  US-China relations have gotten a lot better, improving the outlook for these three stocks

A spokesperson for Maike declined to comment on this story, but said in response to earlier questions from Bloomberg on Sept. 7: “Our company has been deeply involved in developing the commodities industry for nearly 30 years. It had gone through a steady development, as anyone could see. It will soon resume normal activities and continue to contribute to the development of the industry and the local economy.”

copper boom

Born in 1964 in China’s Shaanxi province, he first encountered copper when he got a job purchasing industrial materials for a local company. As a young man, he was paid to guard loads of copper on trains crossing China — which could be a cold job on frigid winter nights.

In 1993, he and some friends settled Maike in the western city of Xi’an, known as the capital of China’s first emperor and the site of the iconic Terracotta Army statues. The group took out a loan of 50,000 yuan (about $7,200) to buy and sell mechanical and electrical products. But his early encounter with copper made an impression, and they soon turned their attention to scrap, copper wire and refined copper.

With a personal character, a broad grin and a light-hearted sense of humor, he was a natural commodity trader whose charisma would help him build a wide network of friends and business contacts.

As China’s economy liberalized, he used his connections to make Maike an intermediary between major international merchants and China’s burgeoning crowd of copper consumers.

In 15 years, China would go from consuming one-tenth of the global copper supply to 50%, triggering a super cycle of skyrocketing prices for the metal used in electrical wires in everything from power cables to air conditioning units.

Resources Casino

This was a savage era when for many the Chinese commodity markets were little more than a casino. Groups of traders would team up to bet together and launch ambushes against their opponents on the other side of the market. The bravest players would be nicknamed after the martial arts masters of popular novels.

While many merchants came and went in these go-go years, He persevered.

“We’ve done a lot of business together in 20 years,” Lilley says. “There were times when the Chinese metal trade was a real wild west and he stood out for his chasteness. He would always live up to his word.”

He also had another attribute essential to a successful commodities trader: a risk appetite.

His big break came in the early days of the supercycle. In May 2005, the Chinese metal industry gathered in Shanghai for the annual conference of the Shanghai Futures Exchange. Copper prices had risen sharply and most producers, manufacturers and traders in the public thought they would fall soon. Even China’s mighty State Reserve Bureau had made bearish bets.

See also  As 10,000 Long Dormant Bitcoins Are Finally Trading, Observers Are Wondering What's Happening

They were shocked to hear Barclays analyst Ingrid Sternby predict copper would hit new highs if Chinese demand outpaced supply. But she was soon proved right, as prices more than doubled over the next 12 months. The SRB’s losses became a national scandal and most Chinese traders missed the opportunity to cash in on the gains.

He was not among them. By paying close attention to the demand from his network of Chinese consumers, he had built a bullish position and benefited greatly from the global price rise.

It was a pattern that he would successfully repeat many times over the years. His preferred strategy was to sell options – on the downside, at the price his Chinese customers would likely see as a buying opportunity, and on the upside, at a price they would likely find too high.

While he enjoyed some of the trappings of success, people who have known him for many years say he remained sober even as his net worth increased to levels that likely made him a dollar billionaire at his peak.

In Shanghai, he regularly had lunch at a Xi’an restaurant, where he ate his favorite steamed cold noodles and fried leek dumplings for 50 yuan ($7).

Financial flows

The evolution of He’s business reflects the changes taking place in the Chinese business world. Although he started out simply as a distributor of physical copper, he soon pioneered the growing interconnections between commodities trading and the financial markets in China.

As Maike grew into the nation’s largest copper importer, he began using the constant flow of metal to raise financing. He could demand advance payments from his end customers, as well as borrow against the increasing amounts of copper he ships and stores in warehouses. Over the years, the connection between copper and cash became well established, and the ebb and flow of China’s credit cycle became a major driver of the global market.

He would use money from his copper trading to speculate on the stock market or, increasingly, invest in China’s thriving real estate sector. From about 2011, he built hotels and business centers, and even his own warehouses in the bonded zone of Shanghai.

“In some ways Maike’s story is the story of modern China”

As the state became an increasingly dominant force in China’s business world, he turned his attention to investments in his hometown, Xi’an, and supported projects under Xi Jinping’s Belt and Road Initiative.

See also  Goldman Sachs has just lowered its price target for the S&P 500. How low it can go.

This year, however, He’s empire started to wobble.

The city of Xi’an was shut down for a month in December and January, and further restrictions were imposed in April and July when Covid resurfaced, hurting He’s real estate investments. His hotels were nearly empty for months and some commercial tenants simply stopped paying rent.

Maike was one of a number of companies that poured their fortunes into the real estate market during the boom years, said Dong Hao, head of the Chaos Ternary Research Institute. “After last year’s sharp turnaround in real estate, such companies have encountered several difficulties,” he said.

Nickel Squeeze

The broader slump in the Chinese economy has also caused copper prices to fall, while Maike has also suffered from banks’ growing cautiousness about China’s commodities sector. Confidence in the industry was shattered by the historic nickel shortage in March, as well as several scandals involving missing aluminum and copper ores.

In recent weeks, Maike has struggled to pay for his copper purchases, and several international companies, including the BHP Group and Chilean Codelco, have halted sales to Maike and diverted freight.

The future is uncertain. He met a group of Chinese banks at a crisis meeting organized by the local Shaanxi government in late August. Maike later said the banks had agreed to back it, including by offering extensions on existing loans.

But trading activity has largely ground to a halt as other traders become increasingly nervous about dealing with the company. And, in the wake of Maike’s troubles, some of the industry’s largest banks are pulling out of metals financing in China in general.

Within China, He’s misery arouses mixed feelings. Many deplore his situation as tragic for China’s commodities industry and symbolic of an economy increasingly dominated by state-owned enterprises.

Others would be less sad to see the end of a business model that turned copper into a financial asset and sometimes caused import margins to deviate from physical fundamentals.

“Traders like Maike have been instrumental in importing copper into China for years – they have bought very consistently to keep the flow of funding going,” said Simon Collins, former head of metal trading at Trafigura Group and the CEO of digital trading platform TradeCloud. . “With the real estate market as it is, I think the music could stop.”

Most read from Bloomberg Businessweek

©2022 Bloomberg LP

LEAVE A REPLY

Please enter your comment!
Please enter your name here