The tycoon who runs a quarter of China’s copper trade is on the ropes

The tycoon who runs a quarter of China’s copper trade is on the ropes

(Bloomberg) — From a start guarding trains full of metal from thieves on freezing winter nights, He Jinbi has built a copper trading house so powerful it handles one in four tons imported into China.

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A born businessman with an infectious sense of humor, the 57-year-old grew Maike Metals International Ltd. through the brutal commodity rush of the early 2000s to become a key conduit between China’s industrial heartlands and global traders such as Glencore Plc.

Now Maike is suffering from a liquidity crisis and his empire is under threat. The ripple effects could be felt around the world: the company handles a million tonnes a year – a quarter of China’s refined copper imports – making it the biggest player on the most important global trade route for the metal and a major trader on the London Exchange metals.

With his wide network of contacts giving enviable insight into China’s factories and construction sites, he has been a poster child for China’s commodity-fueled boom for two decades — making a fortune from unstoppable demand for raw materials and then plunging her in red. hot real estate market.

But this year, Beijing’s restrictive Covid Zero policies have hit both the real estate market and the copper price hard. After months of rumours, he publicly admitted last month that Maike had sought help to resolve liquidity issues.

He said the problems were temporary and only affected a small part of his business, but his commercial counterparties and creditors were cautious. Some Chinese domestic traders have suspended new deals, while one of the company’s longest-standing lenders, ICBC Standard Bank Plc, has grown increasingly concerned that it was moving some copper from China that backed its lending to Maike.

Even if it can secure support from the government and state-owned banks, industry executives say Maike may struggle to maintain its dominant role in China’s copper market.

As He’s rise has been a microcosm of China’s economic boom, its current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only grow.

“In some ways the story of Maike is the story of modern China,” said David Lilley, who became involved with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of the trade house and hedge fund. fund Red Kite. “He has deftly driven the momentum of the Chinese economy, but no one was prepared for the Covid lockdowns.”

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

A Maike spokesman declined to comment for this story, but said in earlier Bloomberg inquiries on Sept. 7: “Our company has been deeply involved in the development of the commodity industry for nearly 30 years. It had maintained a steady growth, as everyone can testify. It will soon resume normal operations and continue to contribute to the development of the industry and the local economy.”

Copper boom

Born in 1964 in the Chinese province of Shaanxi, his first encounter with copper came when he got a job sourcing 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 freezing winter nights.

In 1993, he and several friends founded 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 had an impact and they quickly focused on scrap metal, copper wire and refined copper.

With personality, a big smile and a light sense of humor, he was a natural goods 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 a middleman between major international traders and China’s growing mass of copper consumers.

Over 15 years, China would go from one-tenth of the world’s copper supply to 50%, sparking a supercycle of skyrocketing prices for the metal used in electrical cables in everything from power lines to air conditioning units.

Merchandise casino

This was a wild time when, for many, China’s commodity markets were little more than a casino. Groups of traders would work together to bet together, ambushing their rivals on the other side of the market. The bravest players would be nicknamed the martial art masters of popular novels.

While many merchants came and went in those years, He persisted.

“We did a huge business together for twenty years,” Lilley said. “There were times when the Chinese metal trade was a real wild west and stood out for its dignity. He would always keep his word.”

He also had another key characteristic of a successful commodity trader: an appetite for risk.

His big break came in the early days of the supercycle. In May 2005, China’s metals 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 believed they would soon fall. Even China’s powerful State Reserve Bureau had made bearish bets.

They were shocked to hear Barclays analyst Ingrid Sternby forecast that copper would hit new highs as Chinese demand outstripped supply. But he was soon proven right as prices more than doubled over the next 12 months. SRB’s losses became a national scandal and most Chinese traders missed the opportunity to cash in the profits.

He was not among them. Paying close attention to demand from its network of Chinese consumers, it had built a bullish position and benefited quite a bit from the global rise in prices.

It was a pattern he would repeat with success many times over the years. His preferred strategy involved putting options – on the downside, at a price his Chinese clients were likely to see as a buying opportunity, and on the upside, at a price they were likely to see as too expensive.

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

In Shanghai, he regularly dined at a restaurant serving Xi’an cuisine, where he ate his favorite cold steamed 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 it had started out simply as a distributor of natural copper, it soon pioneered the growing links between commodity businesses and financial markets in China.

As Maike grew to become the country’s leading copper importer, he began using the steady flow of metal to raise financing. He could request advances from his end customers and also borrow against the growing volumes of copper he shipped and held in warehouses. Over the years, the connection between copper and cash became well established and the ebbs and flows of China’s credit cycle became a key driver of the global market.

He would use the money he raised from his copper business to speculate in the stock market or, increasingly, invest in China’s booming real estate sector. Starting around 2011, he built hotels and business centers and even his own warehouses in Shanghai’s restricted zone.

“In a way the story of Maike is the story of modern China”

As the state became an increasingly dominant force in China’s business world, it turned its focus to investment in its hometown of Xi’an, supporting projects under Xi Jinping’s Belt and Road initiative.

This year, however, He’s empire began to falter.

The city of Xi’an faced a month-long lockdown in December and January and further restrictions in April and July as Covid re-emerged, hitting He’s real estate investments. Its hotels remained nearly empty for months, and some commercial tenants simply stopped paying rent.

Maike was one of several companies that sunk their fortunes into the real estate market during the boom years, said Dong Hao, head of the Chaos Trinary Research Institute. “After the sharp change in real estate last year, such companies faced various difficulties,” he said.

Nickel Squeeze

The wider malaise in the Chinese economy also caused the price of copper to fall, while at the same time Maike suffered the effect of banks’ growing wariness towards the commodities sector in China. Confidence in the industry was hurt by nickel’s historic squeeze in March, as well as several scandals involving aluminum and copper ore shortages.

In recent weeks, Maike began to experience difficulties paying for its copper purchases, and several international companies – including BHP Group and Chile’s Codelco – stopped sales to Maike and diverted cargo.

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

But its trading activity has largely ground to a halt as other traders grow increasingly nervous about doing business with the company. And, in the wake of Maike’s troubles, some of the industry’s biggest banks are pulling back from metals financing in China more generally.

In China, his plight is causing mixed feelings. Many lament its plight as a tragedy for China’s commodity industry and emblematic of an economy increasingly dominated by state-owned companies.

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

“For many years, traders like Maike have been very important in bringing copper into China – buying very consistently to keep the funding flowing,” said Simon Collins, former head of metals trading at Trafigura Group. CEO of digital trading platform TradeCloud. “With the real estate market the way it is, I think the music could stop.”

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