At least two global banks involved in commodity financing in China have asked some clients to shift copper and aluminium, used as collateral for loans, to better regulated warehouses, three sources with direct knowledge of the matter said. Banks and trading houses have been making urgent checks on the security of metal holdings in China, sparked by a suspected fraud at Qingdao Port, the world's seventh biggest. Police are investigating the duplication of warehouse receipts by a third-party firm on metal cargos used to obtain financing. Standard Chartered and South Africa's Standard Bank had already contacted clients, two sources said. The banks had requested that some metal stocks be moved to warehouses owned directly by operators, rather than rented by third-parties, said the two people, whose firms have metal in bonded warehouses in Shanghai and the province of Guangdong. Another person at a warehouse firm involved in the issue also confirmed the request from the banks. "We were asked to move stocks to warehouses that are not rented but owned by the warehouse operators," said one of the sources, whose firm trades aluminium and copper, as well as producing aluminium in China. Asked whether it had asked some clients to move metal, Standard Chartered said in an emailed statement: "We recognise that there are currently issues in China around commodity financing which we are monitoring." Arun Murthy, global head of commodities at Standard Chartered, said that commodity financing remained a key focus for the bank. A Standard Bank spokesman said it had nothing more to add at this stage on a statement issued last week. The bank had said it had started investigations into potential irregularities at Qingdao port and was working with local authorities. The sources, who declined to be named because they are not authorised to speak to media, did not detail metal holdings involved. Fees had been waived by the warehouse operator to allow for bonded copper stocks in Shanghai to be moved to storage space directly owned by the operator, one of the sources said. The source said his firm was told that the relocation of metal had to be completed before existing financing deals expired, otherwise metal would be moved to London Metal Exchange (LME) warehouses in Singapore. The more highly regulated LME warehouses are located in several countries in Asia but China does not currently permit them in the country. At least some of the metal appeared to be moving into warehouses in China owned by C. Steinweg Handelsveem B.V., the world's largest independent warehousing and logistics firm. "We know that people are shifting cargo to Steinweg from (affected) warehouses and we are talking about significant amounts of cargo," an industry source said. "It seems the company owns most of its warehouses or has long-term leases and does not work with sub-contractors that do their own business in metals or issue their own title documents." Limited Storage Space The Qingdao port investigation has hit metal prices, reflecting market fears about business practices in China and worries that the probe could spread to other ports and prompt a crackdown on using metal as collateral for financing. Domestic and foreign banks were tightening requirements on new commodity financing deals in China, with some adding new stipulations on how to secure stocks, trading sources said. Pledging commodities to a bank, often using a warehouse receipt as proof of ownership, has become a popular way of raising finance in China, helping create huge stockpiles of metals at some ports in China. A lack of sufficient storage directly owned by warehouse operators in China could become an obstacle to moving stocks. Market estimates put copper in bonded warehouses in Shanghai alone at between 500,000-600,000 tonnes, more than double combined exchange stocks held in LME and Comex warehouses. The head of trade finance for a South East Asian bank, which offers credit to companies importing copper in China, said it was now checking on whether warehouse companies used by its clients had outsourced any part of their business. The Asia manager of a global warehousing company said it was common practice in many countries to outsource the management of warehousing to local companies, particularly in order to avoid dealing with often complex domestic regulations. "It comes down to the rigour and discipline you have in operating with a third party - do you audit the material in the warehouse? Do you audit their procedures? Do you audit their processes?" (Reuters)