JJN - LME Nickel Buyers Worried About Fraudulent Nickel Scandal

2023-03-30 06:04:00 ET

Summary

• The London Metal Exchange is back in the limelight again, along with its notorious nickel contract. This time, the news has to do with reports of potential fraud with a recent LME nickel shipment.
• The scrutiny comes following the discovery of nine warrants, some 54 tons of nickel briquettes, that turned out to contain rocks.
• Access World announced last week that “there is no indication that LME rules were not followed when the material was warranted.” However, it is clear from the outcome that something went very wrong.

Original Post

By Stuart Burns

The London Metal Exchange is back in the limelight again, along with its notorious nickel contract. This time, the news has to do with reports of potential fraud with a recent LME nickel shipment. The scrutiny comes following the discovery of nine warrants, some 54 tons of nickel briquettes, that turned out to contain rocks.

The discovery came following a delivery out of Access World’s Rotterdam warehouse. At the time the nickel arrived at the warehouse, Glencore (GLCNF)(GLNCY) had full ownership. However, a BVI firm called Global Capital Markets purchased it almost immediately. Access World announced last week that “there is no indication that LME rules were not followed when the material was warranted.” However, it is clear from the outcome that something went very wrong.

LME Nickel Not Alone in Contract Fraud

According to Reuters , workers should weight deliveries on arrival. If this was done, a discrepancy should have been apparent. However, Access World is not making any further announcements while investigations are ongoing. Another possible explanation is that someone replaced the delivered nickel with rocks at some point after delivery. Of course, this would be even more disturbing considering it could happen in a tightly regulated and secure facility.

The owner of the consignments are Trafigura in the U.S. and Stratton Metals in the U.K. Unfortunately, these traders are not alone in suffering fraud on nickel contracts. A recent Financial Times post details how Mercuria Energy Group, a Geneva-based multinational trading company, bought 10,000 tons of blister copper from Turkish supplier Bietsan Bakir last summer for $36 million. However, when the cargo arrived in China, workers found the containers to be full of painted rocks.

Trafigura is also alleging systemic fraud in its dealing with Indian businessman Prateek Gupta and his companies. The allegations came following the discovery of falsified paperwork detailing containers of nickel from Mr. Gupta’s firm. At the moment, that case remains ongoing.

Some Think Blockchain Could Prevent Future Scams

Supporters suggest blockchain technology could help negate the risk of fraud by creating an unalterable record of transactions with end-to-end encryption. Still, it is hardly an airtight solution. For example, blockchain could significantly reduce the ability of fraudsters to substitute documentation while goods are in transit. This is potentially what happened in the Trafigura-Gupta case. However, the technology doesn’t do anything to prevent theft or the replacement of the real cargo with a substitute. This is particularly true if the fraudsters know how to assign the proper tracking to the fraudulent replacement.

The idea is nothing new. Mining firms are looking at using blockchain to track cargo from the mine to the buyer. This would mean that companies could securely trace cargo details, right down to chemical analysis and assay results, from mine shaft to refiner and potentially to end user. Banks and shipping companies have been looking at using blockchain as well. In their case, they hope to reduce or even remove the bureaucratic hurdles and risk that comes along with Bills of Lading and Letters of Credit. Unfortunately, progress remains painfully slow.

Clearly, blockchain technology has the potential to reduce risks and increase the efficiency of global transactions. However, it is very difficult to update processes fine-tuned over hundreds of years. Like the LME, global logistics and banking will benefit from blockchain in time. But despite the rare case of fraud, the current systems work well enough to support millions of transactions a year.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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