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From bull to bear market: China commodities shakeout hits investors, threatens mills

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MANILA/BEIJING Only a month ago, Chinese commodities prices were skyrocketing, led by a stampede of speculative investors betting on early signs of recovery in the world’s second-biggest economy.

Now, not only has the bubble been popped but a dive has left steel and iron futures 23 percent off their April peaks and in bear market territory. This in turn threatens to put the brakes on the restart of steel plants that became profitable as prices rose, as well as drive investors to other markets.

When prices shot up in April, Chinese commodities exchanges moved quickly to raise trading fees and push speculators to dial down trading positions, anxious to ensure there was no repeat of the boom and bust Chinese stocks suffered last year.

With steel prices falling sharply, the risk now is producers that reopened – dubbed “zombie” steel mills after being idled when prices slumped in recent years – will have to rethink.

“This month, some good mills are making money but their profits are dropping day by day. The half-dead steel mills that reopened will make big losses – they are uneconomic,” said Xu Zhongbo, head of Beijing Metal Consulting which advises Chinese steel mills.


Weighing on steel prices, inventories held by Chinese traders rose 1.2 percent last week to 9.2 million tonnes, after falling for the past eight weeks, said Kevin Bai of CRU consultancy in Beijing.

“There have been a lot of reopened plants but demand has hardly improved,” said Bai. “We think steel prices may still have some more downward pressure because of the supply response.”

Rebar, a reinforced steel used in construction, fell to as low as 2,085 yuan ($320.40) a tonne on the Shanghai Futures Exchange on Tuesday, before recovering some ground to close at 2,146 yuan on Wednesday, down 23 percent from its April peak.

On the Dalian Commodity Exchange, steelmaking raw material iron ore traded at 385 yuan a tonne on Wednesday, also 23 percent below its peak hit just two weeks ago.

There remains a significant inventory of unsold houses in some of the smaller, more provincial tier 3 and 4 Chinese cities that developers will focus first on selling before constructing new properties, said Standard & Poor’s analyst May Zhong.

“Until we see meaningful destocking in the tier 3 and 4 cities, then we can’t expect construction activity to pick up,” said Zhong.


The aggressive measures taken by commodity exchanges in Dalian, Shanghai and Zhengzhou to rein in speculation, from increasing trading fees and margins to widening daily movement limits, have helped encourage investors to look at other markets to put their money in.

“I am taking a break from commodities futures,” said 42-year-old Ji Xiaoxu from China’s Henan province, who has been investing in futures markets since 2009.

“I am doing some U.S. stocks at the moment as there is no leverage and is safer.”

On Wednesday, the Zhengzhou Commodity Exchange said it would effectively raise trading fees for some institutional investors for rapeseed meal futures contracts from May 13 after a recent jump in prices.

Such was April’s surge in China’s commodity futures trading that daily turnover in 18 contracts averaged $376 billion over the last two weeks, Morgan Stanley said in a report last week.

But the short-term nature of the trading was also evident.

The average holding period in the past weeks for rebar and iron ore futures traded in China was only 2.0 and 2.4 hours, respectively, versus 25.8 hours for Brent crude on ICE Futures, Morgan Stanley said.

“In China, there is so much cash and people just follow the crowd,” said Xu of Beijing Metal Consulting.

($1 = 6.5077 Chinese yuan)

(Additional reporting by Shanghai Newsroom and Melanie Burton in Melbourne; Editing by Ed Davies)

Source: R-Business


Crooks, terrorists, tax evaders: Can new shell company rule stop them?

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NEW YORK The U.S. Treasury Department wants to go after money launderers, tax evaders and terrorists by cracking open the shell companies they use to hide cash flows, but critics say a new agency effort to identify them could be easily evaded.

Treasury last week issued a new rule, effective in 2018, requiring financial institutions to obtain the identities of “beneficial owners” of their client companies and at least one senior manager. Financial firms will have to verify their identities through documents such as passports – but will not have to confirm their ownership stakes in the companies.

That could allow criminals to provide false information with little risk of getting caught, critics say.

“If a company has criminal intent, they are probably not going to file that their beneficial owner is ISIS,” said Anders Rodenberg, who oversees relationships with financial firms in North America at Bureau van Dijk, a beneficial-ownership data provider.

The Treasury Department says its rule – along with separate but related legislation it proposed to Congress – strikes the right balance between rooting out corruption and avoiding burdensome requirements on financial firms and legitimate clients.

But what if a customer lies?

“Then they are committing fraud,” said Steve Hudak, spokesman for Treasury’s Financial Crimes Enforcement Network.

Treasury and law enforcement officials can contact the person a company names as a senior manager if they want to investigate further, Hudak said.

The regulation – called the Customer Due Diligence rule – has been in the works since 2012. It comes at a time when President Obama and other world leaders are under pressure to respond to a string of recent reports known as the Panama Papers.

Distributed by a group of investigative journalists, the reports disclosed how rich and powerful people, including heads of state and convicted financial criminals, use shell companies to avoid paying taxes.

Treasury’s rule will apply to banks, brokers, mutual funds and other financial firms. It will require them not only to collect data on owners and managers, but to update records with changes they discover during routine checks.

Legislation proposed by the agency, which requires congressional approval, would create a federal database and require companies to register either when they incorporate or transfer ownership to the U.S. from overseas.

Critics contend that the plan does not go far enough to unmask shell companies’ true owners. They argue a criminal enterprise can, for instance, keep individual ownership stakes below 25 percent and list anyone as a point person, even if he or she has no real management responsibilities.

“You can only keep the honest people honest,” said Steve Goldstein, chief executive of Alacra, which provides services to banks seeking to comply with current “know-your-customer” regulations. “I don’t think it will be that hard for a bad-actor beneficial owner to avoid detection.”

Industry groups ranging from the American Bankers Association to the American Bar Association have offered different criticism, arguing compliance with the rules will be too costly and time-consuming. James Richards, Wells Fargo & Co’s (WFC.N) global director of financial crimes risk management, said it will be hard to meet new requirements because the information clients provide ranges widely in quality.

“We have to trust without being able to verify that the information they are giving us is accurate,” he said. “The innocent will give us good information or sloppy, bad information by mistake. The guilty will give us bad information, and we won’t be able to tell the difference.”


Having access to a central database maintained by the government could make a difference, Richards said. But as it stands, corporations are formed across 50 states, whose governments have resisted collecting beneficial-ownership data.

In April alone, more than 12 million ownership changes – 400,000 a day – took place at corporations worldwide, according to Orbis, a database of incorporation records owned by Bureau van Dijk. A few corporations may change ownership to hide from international sanctions, but most times it happens as a result of ordinary business practices like opening a foreign subsidiary.

The sheer volume of changes makes it difficult for even legitimate companies to track and report them.

For example, a tire company bought by private equity might know the name of its new owner, but not the investors who put money into the private equity fund. Likewise, the private equity company may not know the identities of the investors, who may have channeled money through family offices or other funds.

Rodenberg, of Bureau van Dijk, said the new rule is a “significant” step forward, but may ultimately provide little transparency.

“Companies all know who owns them and are notified if this ownership changes,” he said. “However, often companies don’t know the owners’ owners – and even less the owners’ owners’ owners.”

(Reporting By Elizabeth Dilts and Suzanne Barlyn in New York; Editing by Lauren Tara LaCapra and Brian Thevenot)

Source: R-Business


Smuggling to avoid taxes to boost Indian gold imports to record – ANZ

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SYDNEY India’s gold imports could hit a record high this year amid widespread smuggling to sidestep government levies on overseas shipments, Australia and New Zealand Bank, Asia’s biggest shipper of physical gold, said on Wednesday.

The forecast by the bank’s head of precious metals, John Levin, runs counter to tallies that show gold imports in decline in the world’s second-biggest gold market after China.

Levin said he expects 15 percent of India’s gold this year to be “smuggled in” or arrive via “other unofficial channels” to beat a 10 percent levy imposed by the government.

Levin also said more semi-refined gold, known as gold dore, was being imported from overseas mining companies because of a lower government levy.

The import duty on gold dore is 8.5 percent.

“You could see a record amount of gold going into India this year,” Levin said, “A lot through unofficial channels and a lot of it going in as semi-refined gold.”

However, industry officials say unofficial imports are also coming down as Indian market prices trade at a discount to the U.S. dollar spot price. 

As recently as a few weeks ago, Indian importers were offering discounts as high as $40 per ounce, or nearly 3 percent of the value to attract buyers.This has been discouraging smugglers as their margins have been squeezed, Daman Prakash Rathod, a director at MNC Bullion, a wholesaler in the southern Indian city of Chennai, said on Wednesday. Officially, India’s gold imports in the 2015/16 fiscal year that ended on March 31 dropped 16 percent from a year ago to 926 tonnes.

ANZ last year handled about 15 percent of the world’s gold shipments, according to Levin.

(Reporting by James Regan; Additional reporting by Rajendra Jadhav)

Source: R-Business

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